NAVAL POSTGRADUATE SCHOOL - DTICnatural gas pipeline market and current unconventional gas market to analyze the ramifications both markets have on European and Eurasian energy security,

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AN ENERGY BRIDGE TOO FAR? UNCONVENTIONAL

NATURAL GAS INNOVATIONS AND EURASIA’S

ENERGY BRIDGE

by

Wayne J. Dahl, Jr.

March 2013

Thesis Advisor: Victoria Clement

Co-Advisor: Mikhail Tsypkin

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AN ENERGY BRIDGE TOO FAR? UNCONVENTIONAL NATURAL GAS

INNOVATIONS AND EURASIA’S ENERGY BRIDGE

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6. AUTHOR(S) Wayne J. Dahl, Jr.

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13. ABSTRACT (maximum 200 words)

Energy security has become a key watchword in defining the contemporary security landscape. Although the 1973 Oil

Crisis is likely the most significant energy dispute in modern history, energy conflicts continue to impact nations and

citizens around the world. Several energy disputes with Russia in the first decade of the twenty-first century serve as

poignant examples of contemporary energy insecurity. The 2006 Russia-Ukraine gas disagreement halted the delivery

of 100 million cubic meters of gas to Europe; in 2007, the Russian-Belarus energy clash direly affected Germany’s

economy. Subsequently, Ukraine siphoned gas from its pipeline to Europe in an attempt to hold European households

hostage during a row with Russia over gas prices in 2009. However, unconventional natural gas innovations, such as

shale gas and Liquefied Natural Gas (LNG), are dynamically altering the energy security relationships between

Russia, the former Soviet republics, and Europe. This thesis will utilize a comparative study of the contemporary

natural gas pipeline market and current unconventional gas market to analyze the ramifications both markets have on

European and Eurasian energy security, future prospects for expansions, and possible sources of contention within

both frameworks, which will lead to an examination of future energy security policy implications.

14. SUBJECT TERMS Energy, energy security, Liquefied Natural Gas, shale gas, natural gas,

pipelines, European Union, Russia, Central Asia, Caspian Basin 15. NUMBER OF

PAGES 129

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iii

Approved for public release; distribution is unlimited

AN ENERGY BRIDGE TOO FAR? UNCONVENTIONAL NATURAL GAS

INNOVATIONS AND EURASIA’S ENERGY BRIDGE

Wayne J. Dahl, Jr.

Captain, United States Army

B.S., Southwestern College, 2004

Submitted in partial fulfillment of the

requirements for the degree of

MASTER OF ARTS IN SECURITY STUDIES

(EUROPE AND EURASIA)

from the

NAVAL POSTGRADUATE SCHOOL

March 2013

Author: Wayne J. Dahl, Jr.

Approved by: Victoria Clement

Thesis Co-Advisor

Mikhail Tsypkin

Thesis Co-Advisor

Harold Trinkunas

Chair, Department of National Security Affairs

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v

ABSTRACT

Energy security has become a key watchword in defining the contemporary security

landscape. Although the 1973 Oil Crisis is likely the most significant energy dispute in

modern history, energy conflicts continue to impact nations and citizens around the

world. Several energy disputes with Russia in the first decade of the twenty-first century

serve as poignant examples of contemporary energy insecurity. The 2006 Russia-Ukraine

gas disagreement halted the delivery of 100 million cubic meters of gas to Europe; in

2007, the Russian-Belarus energy clash direly affected Germany’s economy.

Subsequently, Ukraine siphoned gas from its pipeline to Europe in an attempt to hold

European households hostage during a row with Russia over gas prices in 2009.

However, unconventional natural gas innovations, such as shale gas and Liquefied

Natural Gas (LNG), are dynamically altering the energy security relationships between

Russia, the former Soviet republics, and Europe. This thesis will utilize a comparative

study of the contemporary natural gas pipeline market and current unconventional gas

market to analyze the ramifications both markets have on European and Eurasian energy

security, future prospects for expansions, and possible sources of contention within both

frameworks, which will lead to an examination of future energy security policy

implications.

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TABLE OF CONTENTS

I. INTRODUCTION........................................................................................................1 A. IMPORTANCE ................................................................................................2 B. LITERATURE REVIEW ...............................................................................4 C. PROBLEMS AND HYPOTHESES .............................................................10

D. METHODS AND SOURCES .......................................................................12 E. THESIS OVERVIEW ...................................................................................12

II. THE CONTEMPORARY EURASIAN ENERGY BRIDGE ................................15

A. THE CONTEMPORARY EURASIAN PIPELINE BRIDGE ..................16 1. Advantages..........................................................................................17 2. Disadvantages .....................................................................................18

B. NORD STREAM: RUSSIA’S TROJAN HORSE? .....................................20

1. Pipeline Proponents ...........................................................................21 2. Arguments against Nord Stream ......................................................22

C. EU-RUSSIAN ENERGY COMPETITION IN THE SOUTHERN

GAS CORRIDOR ..........................................................................................24

1. Competing Pipelines? ........................................................................25 2. Nabucco: “The New Gas Bridge from Asia to Europe” .................28

a. Rationale..................................................................................29

b. Challenges ...............................................................................30

3. South Stream: “Energizing Europe” ...............................................33 a. Rationale..................................................................................34 b. Challenges ...............................................................................36

4. Implications of South Stream’s Probable Development.................38 D. CONCLUSION ..............................................................................................41

III. UNCONVENTIONAL GAS INNOVATIONS: PANACEA, PROPAGANDA,

OR PRACTICAL SOLUTION? ...............................................................................45 A. SHALE GAS: FRACTURING THE CONVENTIONAL GAS

MARKET........................................................................................................46 1. Overview and Global Impact ............................................................46

2. Hurdles to Shale Gas Extraction ......................................................50 3. Prospects for European Extraction ..................................................53

B. LIQUEFIED NATURAL GAS: SECURITY IN LIQUIDITY ..................58 1. Overview and Global Impact ............................................................58 2. Obstacles to Investment .....................................................................60 3. Prospects for European LNG Expansion ........................................63

C. CONCLUSION ..............................................................................................66

IV. POLICY IMPLICATIONS OF THE ALTERED ENERGY BRIDGE................69 A. RUSSIA: WILL MOSCOW GRIN AND BEAR IT? .................................69

1. Internal Policies ..................................................................................69

2. External Relations ..............................................................................75 B. CASPIAN REGION: FUTURE OF THE “NEW NORTH SEA” .............79

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1. External Relations ..............................................................................80 2. Internal Policies ..................................................................................82

C. EUROPEAN UNION: MARKET LIBERALIZATION—THE

CRITICAL INFRASTRUCTURE ...............................................................83 1. Internal Policies ..................................................................................83 2. External Relations ..............................................................................89

D. CONCLUSION ..............................................................................................92

V. CONCLUSION ..........................................................................................................95

LIST OF REFERENCES ....................................................................................................101

INITIAL DISTRIBUTION LIST .......................................................................................111

ix

LIST OF FIGURES

Eurasian pipeline network................................................................................16 Figure 1.

Gas networks of Central Asia ..........................................................................25 Figure 2.

World shale gas resources: 2011 EIA initial assessment .................................48 Figure 3.

Current and planned European LNG infrastructure .........................................64 Figure 4.

Baltic and Central-Eastern European Market Interconnection Plans ..............85 Figure 5.

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LIST OF TABLES

Table 1. Russia’s pipeline export infrastructure to Europe (in bcm) .............................17

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LIST OF ACRONYMS AND ABBREVIATIONS

BCM Billion Cubic Meters

BTC Baku-Tbilisi-Ceyhan Pipeline

BTE Baku-Tbilisi-Erzurum Pipeline

CEE Central and Eastern Europe

CEO Chief Executive Officer

CIS Commonwealth of Independent States

CSTO Collective Security Treaty Organization

EC European Commission

EIA Energy Information Administration

EPA Environmental Protection Agency

EU European Union

EUR Euro

FSU Former Soviet Union

IEA International Energy Agency

IFRI Institut Francais des Relations Internationales

KPMG Klynveld Peat Marwick Goerdeler

KM Kilometer

LNG Liquefied Natural Gas

M3 Cubic Meters

MMBTU Million British Thermal Units

NATO North Atlantic Treaty Organization

OPEC Organization of the Petroleum Exporting Countries

OSCE Organization for Security and Cooperation in Europe

SCO Shanghai Cooperation Organization

TANAP Trans-Anatolian Pipeline

TCF Trillion Cubic Feet

TSO Transport System Operator

UK United Kingdom

U.S. United States

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ACKNOWLEDGMENTS

First of all, I would like to express sincere gratitude to the United States Army,

which provided me this opportunity for professional development and personal growth. I

would also like to thank the many professors at the Naval Postgraduate School who

provided insight, knowledge, and enthusiasm while challenging me to “ponder the

imponderables.” Specifically, I owe a large debt to Dr. Victoria Clement, who provided

insight in Central Asian affairs and viewpoints and challenged me to become a better

writer, and to Dr. Mikhail Tsypkin for his perception of Russian domestic and foreign

policy and for myriad articles and current reports germane to this thesis. I am also

indebted to Dr. David S. Yost for his guidance during my early quarters at the Naval

Postgraduate School that led me to this thesis topic.

I owe the largest debt to my wife, Rachael, and my two boys, Gabriel and

Alexander, for their interest during this endeavor, unending support as I served in

previous leadership positions, and understanding during the absences of their husband

and father. I would also like to thank my parents, Wayne Sr. and Gloria, for teaching me

the value of hard work. Finally, I would like to thank my colleagues at the Naval

Postgraduate School who served as a sounding board for ideas and a source of new

inspiration.

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1

I. INTRODUCTION

Energy security has become a key watchword in defining the contemporary

security landscape. Although the 1973 Oil Crisis is likely the most significant energy

dispute in modern history, energy conflicts continue to impact nations and citizens

around the world. For example, Nigerian rebels set fire to their country’s oil pipeline in

2005 and attacked the Lagos oil import terminal in 2009; Somali pirates hijacked a Saudi

oil tanker in February 2011; North Sudan halted oil shipments from South Sudan in a

2011 dispute over customs fees; and South Sudan recently responded in April 2012 by

seizing an oil field in North Sudan. The January 2013 terrorist raid and international

hostage crisis at Algeria’s Amanas natural gas facility provides a poignant illustration of

the fragility of energy security. Moreover, Iran’s threats to mine the Strait of Hormuz are

troubling indicators of potential shocks to the international oil market. The Eurasian gas

market is also rife with political instability. Several energy disputes with Russia in the

first decade of the 21st Century serve as poignant examples of European/Eurasian energy

insecurity. The 2006 Russia-Ukraine gas disagreement halted the delivery of 100 million

cubic meters of gas to Europe; in 2007, the Russian-Belarus energy clash direly affected

Germany’s economy. Subsequently, Ukraine siphoned gas from its pipeline to Europe in

an attempt to hold European households hostage during a row with Russia over gas prices

in 2009. In Central Asia, a 2009 pipeline explosion sparked a 2010 Russo-Turkmen gas

war, which Ashgabat survived with loans from China.1 Thus, fear of energy blackmail

and terrorist attacks on infrastructure permeate current defense analysis. However,

unconventional natural gas innovations, such as shale gas and Liquefied Natural Gas, are

dynamically altering the energy security relationships between Russia, the former Soviet

republics, and Europe. Most significantly, Liquefied Natural Gas has enabled Europe to

1 “Algeria’s hostage crisis: A murky mess,” Economist, January 18, 2013, accessed January 18, 2013,

http://www.economist.com/blogs/pomegranate/2013/01/algerias-hostage-crisis; Bendik Solum Whist, Nord Stream: Not Just a Pipeline, FNI Report 15 (Fridtjof Nanses Institut, 2008), 14, accessed January 25, 2012, http://www.fni.no/doc&pdf.FNI-R1508.pdf; Marcin Kaczmarski, “Domestic Sources of Russia’s China Policy,” Problems of Post-Soviet Communism 59, no. 2 (April 2012), 7; Gal Luft and Anne Korin, ed., Energy Security Challenges for the 21

st Century: A Reference Handbook (Washington, D.C.: Library of

Congress Cataloging-in-Publication Data, 2009), ix.

2

blunt Moscow’s energy blackmail attacks by diminishing Russia’s market share of

European energy imports—bolstering European energy security.

A. IMPORTANCE

A myriad of national defense white papers and security strategies highlight energy

security as a priority area to include Austria, Bulgaria, France, Germany, Italy, Latvia,

Norway, Poland, Russia, the United Kingdom (UK), and the United States (U.S.) among

many others. While most security strategies emphasize regional stability in energy

suppliers’ neighborhoods and physical infrastructure security, Poland’s white paper cites

Russia’s energy policy as a direct risk to Polish national security: “The Russian

Federation, taking advantage of the rising energy prices, has been attempting intensively

to reinforce its position on a supraregional level.”2 Additionally, multilateral

organizations and defense alliances have made commitments to protect energy

infrastructure or promote energy security including the North Atlantic Treaty

Organization (NATO), European Union (EU), Shanghai Cooperation Organization

(SCO), Organization for Security and Cooperation in Europe (OSCE), and Collective

Security Treaty Organization (CSTO).3 Although the placement of energy security under

the purview of military alliances may be unsettling, most countries employ market

principles and infrastructure diversification to counter energy risks.

Russia and several European nations have responded to mounting energy

instabilities by developing gas pipelines from Russia directly to Central Europe.

Although multiple energy disputes with transit states would seem like a boon for the

Nord Stream and South Stream projects, current political sentiment in Belarus, the Baltic

States, Poland, Scandinavia, Ukraine, and European policy centers appear

2 National Security Strategy of the Republic of Poland (Warsaw: 2007), 6, accessed August 10, 2012,

http://merln.ndu.edu/whitepapers/Poland-2007-eng.pdf.

3 Félix Arteaga, “Energy Security in Central Asia: Infrastructure and Risk,” Madrid: Real Instituto Elcano, 2010, accessed July 31, 2012, http://www.realinstitutoelcano.org/wps/portal/rielcano_eng/Content?WCM_GLOBAL_CONTEXT=/elcano/Elcano_in/Zonas_in/ARI1–2010; Günther Oettinger, “Energy Security for Europe: The EU Agenda until 2050,” February 10, 2011, EUROPA - Press Releases, accessed August 2, 2012, http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/11/98&format=HTML&aged=0&language=EN&guilanguage=en.

3

overwhelmingly opposed to routes that bypass Eastern Europe. Thus, German and Italian

investment in the Nord Stream and South Stream pipelines, respectively, may have been

purchased at great economic and political cost. First, several analysts argue these energy

projects will consolidate Russia’s control over Europe’s supply.4 Second, unilateral

energy pacts hobble the EU’s ability to coherently negotiate with Russia.5 Furthermore,

Europe’s future energy security will likely rely on exports from the Caspian Basin—

namely, Azerbaijan, Kazakhstan, and Turkmenistan. Therefore, strengthening the energy

bridge from Central Asia and the South Caucasus region to Europe is a strategic

imperative for the EU. Yet, this energy network may be imperiled by unreliable access to

energy sources and aggressive Russian energy diplomacy. During President Vladimir

Putin’s July 9, 2012, address to Russia’s ambassadors, he touted economic power as the

source of Russia’s strength and affirmed that economic integration in the Commonwealth

of Independent States (CIS) is Russia’s core strategic objective.6 Thus, it appears that

Russia seeks to control the energy bridge from Central Asia to Europe to shore-up its

influence in CIS nations, former Soviet republics, and Europe itself. However, dynamic

natural gas technologies have altered the energy environment—relegating geographic

dependence on neighboring states for energy transit or sales.

Unconventional gas innovation—shale gas and Liquefied Natural Gas (LNG)—

has been transforming the energy landscape for the last decade. Less than ten years ago,

shale gas comprised two percent of U.S. domestic output, but currently makes up a third

of U.S. gas production. Additionally, the U.S. National Petroleum Council asserts that the

United States alone holds shale gas deposits to provide approximately a century of energy

4 Alexander Ghaleb, “Natural Gas as an Instrument of Russian State Power,” Letort Paper, Strategic

Studies Institute-U.S. Army War College, October 2011, 127; Robert L. Larsson, Nord Stream, Sweden and Baltic Sea Security (Stockholm: Swedish Defense Research Agency, 2007), 7,accessed July 30, 2012, http://www2.foi.se/rapp/foir2251.pdf; Ariel Cohen, “Russia: The flawed Energy Superpower,” in Energy Security Challenges for the 21st Century: A Reference Handbook, ed., Gal Luft and Anne Korin (Washington, D.C.: Library of Congress Cataloging-in-Publication Data, 2009), 94; Jeffrey Mankoff, “Eurasian Energy Security,” Council Special Report (Council on Foreign Relations), no. 43 (February 2009); accessed July 31, 2012, http://www.cfr.org/europerussia/eurasian-energy-security/p18418, 14 & 27.

5 Institut Français des Relations Internationales, Oil and Gas Delivery to Europe: An Overview of Existing and Planned Infrastructures (Paris: IFRI, 2011), 71; Ariel Cohen, “Russia: The flawed Energy Superpower,” 94.

6 Vladimir Putin, “Russia in a Changing World: Stable Priorities and New Opportunities,” July 9, 2012, Kremlin-Press Release, accessed July 25, 2012, http://eng.kremlin.ru/news/4145.

4

at current U.S. consumption rates.7 In the past decade, the United States has stopped

importing natural gas, and LNG shipments previously bound for the U.S. market have

been redirected to Europe. Furthermore, the United States is likely to become a gas

exporter in the next decade. Europe has been diversifying energy sources by building

LNG terminals to receive increased shipments from Africa and the Middle East. The EU-

27 estimates that its LNG consumption will increase from 8.9 percent of its energy mix to

31.8 by 2030. Because Russian does not ship LNG to Europe, LNG may significantly

reduce EU reliance on Russian gas. There is also evidence of substantial shale gas

availability in France, Germany, the Netherlands, and Poland, which will shift the sources

of gas-flows within Europe. If environmental concerns caused by shale gas production

can be addressed, this new gas source could increase EU domestic energy production—

further decreasing the share of Russian gas in Europe’s energy mix.8 Therefore, the

developments of shale gas and LNG could create a new energy paradigm where

geography does not dictate energy relationships or geopolitical energy influence. These

innovations have the potential to weaken Russia’s monopoly on natural gas in the region

by offering Middle Eastern or African LNG alternatives to Russian gas, and European

shale gas deposits provide the opportunity for the European Union to produce a portion of

its own energy further reducing dependence on Gazprom and the Kremlin.

B. LITERATURE REVIEW

Although shale gas and LNG technologies are transforming the natural gas

industry, Eurasian energy security policies may not significantly adjust unless these

technological advances address fundamental energy security threats. Thus, to effectively

examine the results of unconventional gas production, the sources of energy insecurity

must be explored. A predominant theme emerged as many analysts attribute insecurity in

European and Eurasian energy sectors to Russia’s aggressive pipeline diplomacy. There

7 Frank A. Verrastro, “The Role of Unconventional Oil and Gas: A New Paradigm for Energy,” in

2012 Global Forecast: Risk, Opportunity, and the Next Administration, ed. Craig Cohen and Josiane Gabel (Washington, DC: Center for Strategic and International Studies, 2012), 66–67.

8 Institut Français des Relations Internationales, Oil and Gas Delivery to Europe, 57–58; Baker Institute for Public Policy, “Shale Gas and U.S. National Security,” Baker Institute Policy Report, No. 49 (October 2011), 1 & 7.

5

is striking evidence that Russia flexes its energy muscles to coerce other nations.

Alexander Ghaleb of the Strategic Studies Institute at the U.S. Army War College affirms

that Moscow has used gas disruptions and price disputes or threatened to impose these

sanctions over forty times since the collapse of the Soviet Union.9 In the reference

handbook, Energy Security Challenges for the 21st Century, Ariel Cohen, Senior

Research Fellow for Russian and Eurasian Studies and International Energy Policy at the

Kathryn and Shelby Cullom Davis Institute for International Studies, agrees that Russia

has already demonstrated its ability to drastically increase energy prices as a tool to

implement its foreign policy. He further argues that the Kremlin believes customer

governments will not challenge Russia’s aggressive energy diplomacy.10 According to

Jeffrey Mankoff, Associate Director of International Security Studies at Yale University,

the 2009 Ukraine gas dispute showed that Russia has shown its ability to forgo short-term

economic gain to secure long-term diplomatic dominance.11 Ghaleb further purports that

Russia will use natural gas disruptions or price disputes to influence NATO decision

making in the future and affect the geostrategic policy of the United States and its NATO

allies.12

Apart from energy disputes, several observers fear Russia will use its energy

infrastructure as a means to rationalize military intervention in other states. Robert

Larsson, a security policy analyst at the Swedish Defense Research Agency, affirms in

his assessment on the Nord Stream pipeline that the Baltic and Scandinavian states fear

Russian military presence in their territorial waters under the guise of military protection

of Russia’s strategic energy investment—namely the Nord Stream pipeline.13 According

to some analysts, the 2008 Russo-Georgian War is a powerful example of the confluence

between energy interests and military power. While most analysts argue that Moscow’s

energy dominance played a key role in EU inaction during the 2008 Georgia invasion,

9 Ghaleb, “Natural Gas as an Instrument of Russian State Power,” 127.

10 Ariel Cohen, “Russia: The flawed Energy Superpower,” 92–93.

11 Mankoff, “Eurasian Energy Security,” 14.


13 Robert L. Larsson, Nord Stream, Sweden and Baltic Sea Security, 7.

6

Cohen points out that “controlling strategic energy corridors from the Caspian Sea to the

Black Sea and beyond” was a key impetus for the 2008 Russo-Georgian War. This

conflict not only allowed Russia to maintain physical control of key transit pipelines from

Central Asia, but ensured that the west viewed the Caspian region as too unstable a

market to continue energy infrastructure investment to bypass Russia.14 Mankoff agrees

Russia’s military action “has only reinforced Russian dominance in the energy sphere,

raising the stakes for countries in the region that would seek to escape its grip.”15

The aforementioned scholars and analysts believe the expansion of the Nord

Stream and South Stream energy pipelines, which bypass the Baltic states, Poland, and

Ukraine, will give Russia even greater power in Eastern Europe, which receives 80

percent of its energy from Gazprom, while the Baltic States, Finland, and Slovakia are

100 percent dependent on Russian energy. Nord Stream and South Stream create gas

route to the heart of Europe that allow Russia to turn off energy to Belarus, Poland, and

Ukraine without affecting its most important customers in Europe—namely Germany and

Italy. Furthermore, these pipelines will link nations to Gazprom sources that have yet to

depend on Russian energy, like the United Kingdom and the Netherlands. As EU

dependence on imported gas is projected to grow to over 80 percent and production in the

North Sea is anticipated to decrease by 40 percent before 2020, the EU and NATO may

also become victims of energy blackmail.16

In addition to geostrategic consequences of Russia’s aggressive energy

diplomacy, many analysts are concerned with the market ramifications of the Kremlin’s

control of Russian energy companies. Kevin C. Smith, a senior associate at the Center for

Strategic and International Studies, argues that Gazprom’s status as a domestic monopoly

may limit foreign companies’ ability to negotiate prices or quantities with the

government-backed giant. Russia’s use of intermediary companies and pipeline

consortium registrations in Switzerland also prevents European governments from

14 Cohen, “Russia: The flawed Energy Superpower,” 92.


16 Robert L. Larsson, Nord Stream, Sweden and Baltic Sea Security, 7; Cohen, “Russia: The flawed Energy Superpower,” 94; Ghaleb, “Natrual Gas as an Instrument of Russian State Power,” 127; Mankoff, “Eurasian Energy Security,” 14 & 27.

7

gaining insight into the consortium’s activities. Therefore, Russia may control

downstream actions of European companies and influence other states via its major stake

in pipeline consortium.17 When assessing the South Stream versus Nabucco pipeline

investment opportunities, Rafael Fernández from the Department of Applied Economics

of the Complutense University of Madrid observed, Russia consistently maintains fifty-

one percent stake or more in international consortiums to control these projects.18

Moscow has also used consortiums and long term energy agreements to retain control of

export markets from Central Asia and the Caspian Basin, while blocking infrastructure

investment that would weaken Russia’s monopoly of the Eurasian energy bridge. In

addition to establishing multinational consortiums, Moscow consistently seeks to increase

its investment in European energy infrastructure, like pipelines, refineries, electric grids,

and port terminals to gain influence in downstream market activities, and possibly serve

as tools of Russia’s foreign policy.19

Although Russia has been an unscrupulous energy provider, European and

Eurasian energy insecurity is not rooted in aggressive pipeline diplomacy, but the

concentration of energy suppliers in the region.20 Daniel Yergin, founder of Cambridge

Energy Research Associates and CNBC’s Global Energy Expert, views energy in a

global context and differentiates energy security from the perspective of supplier and

consumer. Russia, as an energy exporter, desires “security of demand” for its exports and

control of strategic resources, including majority stakes in downstream infrastructure.

This analysis follows Smith’s assessment of Russia’s aggressive energy investment

choices, but casts these decisions in the light of rational action for the energy supplier.

Yet, most of the developed world is a consumer of energy and seeks adequate supplies at

17 Keith C. Smith, “Lack of Transparency in Russian Energy Trade,” Center for Strategic and

International Studies, 4 & 15, accessed July 31, 2012, http://csis.org/files/publication/100702_Smith_LackOfTransparency_Web.pdf.

18 Rafael Fernández, “The EU and Natural Gas from Central Asia: Is Nabucco the Best Option?” (Madrid: Real Instituto Elcano, 2010), 7, accessed July 31, 2012, http://www.realinstituotelcano.org/wps/portal/rielcano_eng/content?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/asia-pacific/ari102–2009.

19 Ibid., Mankoff, “Eurasian Energy Security,” 16.

20 Theodore Moran, “The Globalization of America’s Defense Industries: Managing the Threat of Foreign Dependence,” International Security 15, no. 1 (1990), 80.

8

reasonable prices, which runs counter to Russia’s aims. Thus, the European energy

debate focuses on how to foster stability whilst dependent on imported natural gas.21

Furthermore, Yergin affirms that high energy prices and energy insecurity are the result

of global supply and demand, but often exacerbated by exporter’s domestic policies or

monopolistic control of the energy industry. Simply put, the key to energy security is

diversification.22 While attesting that Russia will use natural gas to influence NATO

decision making, Ghaleb confirms that market forces empower Moscow: “Russia’s

monopoly of the gas supply to Eastern Europe allows it to impose unilateral sanctions at

will, without the fear that the target will attempt to get gas from other European

states…because the other European states also get much of their gas from Russia.”23

Thus, Russia’s aggressive energy diplomacy is fueled by lack of diversified energy

resources or transit routes in Europe and Eurasia. In his examination of the feasibility of

the Nabucco project, Rafael Fernández provided troubling statistics concerning Europe’s

energy dependence. As of 2009, dependence on Russian energy in Finland, Latvia,

Lithuania, and Slovakia was absolute as these nations received 100 percent of their

natural gas from Russia. Austria, Czech Republic, Greece, and Hungary purchased 75

percent of their energy from Gazprom, while Poland, Romania, and Slovenia were

dependent on Russia for over 50 percent of their energy-mix. Furthermore, the EU-27

imported 43 percent of its natural gas from Russia.24

Some analysts believe that the global demand for gas will continue to increase,

which will place Europe in a more dire position due to greater competitions for natural

gas. Ghaleb purports, “unless new alternative energy sources emerge, natural gas will

surpass oil by the year 2050, and will grow to become the fuel of the future.”25 Dr.

Michael Klare, U.S. defense policy and oil analyst, forecasts in Energy Security

Challenges for the 21st Century the gap between energy demand for oil and gas greatly

21 Daniel Yergin, “Ensuring Energy Security,” Foreign Affairs 85, no. 2 (Mar 2006): 71–72.

22 Ibid., 70, 73–74.


24 Rafael Fernandez, ““The EU and Natural Gas from Central Asia: Is Nabucco the Best Option?,” 1.


9

outstripping supply, and will surely increase the risk of great power conflicts over energy

resources. He further argues that Russia is not the nation most likely to use military force

to protect its energy assets: “It is the United States that, until now, has devoted most

effort to the protection of foreign oil-producing regimes and that has most vigorously

employed military force to ensure safe access to overseas sources of energy.”26

Moreover, he affirms that China has used the Shanghai Cooperation Organization (SCO)

and joint military training to provide military assistance to its energy partners in Central

Asia; thus, military confrontation between the United States and China over energy

resources is an emerging reality.27 Yet, energy shortages may not necessarily result in

open military conflict. Despite tensions during the 1973 oil crisis, military force was not

used to normalize the oil market.

Furthermore, Daniel Yergin examined historical responses to peak oil periods in

“Ensuring Energy Security” and determined: “despite the current pessimism, higher oil

prices will do what higher prices usually do: fuel growth in new supplies by significantly

increasing investment and by turning marginal opportunities into commercial

prospects.”28 In other words, energy shortages in the future will likely produce

investment in alternative energy fields or projects that may not have been economical

when energy prices were lower. Yergin also maintains that increased capacity in the oil

market will come from “nontraditional supplies” such as oil sands or ultra-deep water

deposits, which are both a reality through continual advances in technology. In addition

to unconventional extraction, conventional supplies have increased in the past, such as

the Caspian oil pipeline or U.S. offshore oil extraction.29 After analyzing the global oil

market, Yergin provides three principles for energy security. First, diversification of

supply is the key to energy security. If one provider disrupts supply, then other suppliers

can provide an alternative, which supports consumers’ and producers’ desires for a stable

26 Michael T. Klare, “There Will Be Blood: Political Violence, Regional Warfare, and the Risk of

Great-Power Conflict over Contested Energy Sources,” in Energy Security Challenges for the 21st Century: A Reference Handbook, ed., Gal Luft and Anne Korin (Washington, D.C.: Library of Congress Cataloging-in-Publication Data, 2009), 59.

27 Ibid.

28 Yergin, “Ensuring Energy Security,” 6.

29 Ibid.

10

market. Second, consumers should seek a “buffer” in the supply system to serve against

shocks, which can include storage facilities, strategic reserves, or spare production

capacity. Lastly, states must recognize the “reality of integration.” According to Yergin,

“There is only one oil market, a complex and worldwide system that moves and

consumes about 86 million barrels of oil every day…Secession is not an option.”30

Although Yergin examines the global oil market, his principles are also applicable

to the gas market. Currently, European and Eurasian energy providers hold a monopoly

on sources or export routes; however, Yergin’s assessment of nontraditional supply

exploration in oil markets holds true for natural gas as well. Shale gas production in the

United States and the growth of LNG exporters in Africa and the Middle East have

already positively affected Europe’s energy market and decreased reliance on Russian

gas. With substantial shale gas deposits in several European states, including Poland,

Europe could further decrease dependence on imported gas, and developing LNG

terminals and resilient infrastructure buffers would further improve Europe’s energy

security. Yet, increasing Europe’s energy independence could have ramifications in

Central Asia as well. If Europe begins investing in alternatives to pipeline gas, the

Nabucco project is in peril of being abandoned, which could solidify Russia’s economic

dominance in the Caspian Basin and Central Asian Republics. Incidentally,

unconventional gas exploration and shipment has the potential to globalize the natural gas

market—aligning Yergin’s security principles with natural gas production. Still, several

significant hurdles to nontraditional natural gas exploration remain (discussed below),

which could certainly inhibit the development of a global gas market and empower

Russia to maintain its dominant control of the Eurasian energy bridge.

C. PROBLEMS AND HYPOTHESES

If the international oil market restricts the ability of individual actors from

significantly leveraging energy assets to coerce other states, then a growing international

gas market would be welcome news in Europe, but may have diverging effects in Central

Asia or the Caspian Region. To fully examine the effects of unconventional shale gas

30 Ibid., 7.

11

exploration, the status of the international gas market must first be assessed. Is there an

emerging international marketplace and how will an international gas market to truly

change the levers of energy power in Europe and Eurasia? Yet, before answering these

questions, the critical hurdles to shale gas and LNG development must be addressed.

Currently, the most significant short-term inhibitor to development is the environmental

repercussions of shale gas extraction by pumping water, sand and chemicals into rock

formations at high pressure. This technique is known as hydraulic fracturing or

“fracking” and poses possible environmental risks, including poisoning groundwater and

increased greenhouse gas emissions over traditional gas extraction. As a result, France

has banned shale gas drilling and Chevron ceased extraction in Bulgaria and Romania

due to environmental protests. Thus, one focus in this thesis will be the most recent

environmental assessment of shale gas and its impact on the extraction of international

shale gas resources. Based on the EU’s clean energy goals and value of renewable

energy, it seems unlikely that most European countries will harvest shale gas deposits.

Still, Eastern European states, like Poland, may override the EU’s environmental norms

in support of increased energy security.

In addition to environmental concerns, economic shortfalls may inhibit shale gas

and LNG investment. In order to increase production of shale gas and LNG shipping,

European companies or governments will be required to spend a large amount building

LNG infrastructure or shale gas extraction technologies. While consortiums with western

companies are sure to limit the monetary burden of new infrastructure, investments in

unconventional natural gas will likely divert funds from renewable energies or competing

gas infrastructure projects—namely the Nabucco pipeline from Central Asia. Therefore,

this study will also examine economic determinants to infrastructure development.

Yet, the greatest obstacle to unconventional gas exploration is not economical or

environmental, but political. Government decision-making will likely play the greatest

role in determining the emergence of an international gas market. This realization leads to

the final issue this thesis will investigate, what are the domestic and foreign policy

implications for European/Eurasian energy investment? Will the European Union

abandon the Nabucco project? Will this abandoned project enable Russia to build the

12

South Stream pipeline? Will Russia gain a stronger influence in the Central Asia and the

South Caucuses and merely redirect energy sources to China? Although, some observers,

including the International Energy Agency, believe global natural gas supply may exceed

demand as early as 2015, it is likely that Europe will still require natural gas from Russia

to meet it future energy needs. Therefore, examining the policy implications concerning

energy diplomacy amongst Europe, Russia, and the Caspian Basin is a central focus of

this thesis.

D. METHODS AND SOURCES

This thesis will utilize a comparative study to analyze the policy implication of

unconventional gas exploration. The first area of examination will be the rigid pipeline-

based conventional natural gas market that currently exists in Europe and Eurasia.

Advantages and disadvantages within this framework, and prospects for future

development or conflicts will be explored. Furthermore, historic energy disputes and

relationships will be introduced to emphasize the positive and negative aspects of the

pipeline system. The physical infrastructure and government, international, and private

actors will be described as well. After reviewing the traditional pipeline energy market,

this thesis will explore the unconventional natural gas industry—shale gas exploration

and Liquefied Natural Gas. First, an examination of shale gas’ impact in the U.S. energy

market will be reviewed, which will be followed by exploring the effect of these energy

resources in Europe. After investigating the current unconventional gas market, prospects

for future exploration and controversies will be explored. Thus, this thesis will compare

the contemporary natural gas pipeline market and current unconventional gas market, the

ramifications both markets have on European and Eurasian energy security, future

prospects for expansions, and possible sources of contention within both frameworks,

which will lead to an examination of future policy implications.

E. THESIS OVERVIEW

In order to illustrate how unconventional natural gas innovations have altered the

energy security relationships between Russia, the former Soviet republics, and Europe,

the thesis will open with an examination of the contemporary Eurasian energy bridge.

13

The first chapter will provide an overview of Russian pipelines that supply Eurasian

energy to Europe. In a survey of traditional natural gas pipeline transit routes, this thesis

will highlight the monopolistic power employed by the Kremlin in Eastern Europe,

Central Asia, and the Caspian Region. After exploring advantages and disadvantages of

the current pipeline system, this chapter will examine the Nord Steam pipeline as a lens

for viewing geopolitical tensions of pipeline politics between Europe and Russian and

among EU member states. In order to further explore European-Eurasian energy

relations, the first chapter will review EU-Russian competition in the Southern Gas

Corridor through examining the projected gas market through 2035. The chapter will also

examine how EU-Russian competition in the southern gas corridor illustrates the EU’s

inability to compete with Russia in pipeline politics, developing the South Stream

pipeline will not significantly alter contemporary pipeline politics governing the Eurasian

Energy Bridge. The first chapter’s conclusion will highlight possible avenues for

European energy diversity.

The second chapter will explore shale gas and LNG innovations and their

repercussions on U.S. and European markets over the last decade in to illustrate the

growing international natural gas marketplace and the likelihood these market forces will

make a significant difference in European and Eurasian energy security. After reviewing

the effects of unconventional natural gas exploration and shipment, this thesis will

examine the problems facing expanding unconventional gas exploration—environmental

concerns and monetary constraints. In general, this thesis will focus on the prospects of

developing shale gas resources in Europe/Eurasia as these energy resources will directly

influence energy security in the region. The second chapter’s conclusion will illustrate

how shale gas and LNG advances are reshaping the European-Eurasian gas markets and

highlight critical policy choices facing the EU, Russia, and Caspian hydrocarbon states.

After assessing unconventional natural gas innovation and its direct effect on the

Eurasian energy bridge, the third chapter will examine the domestic and foreign policy

implications of this paradigm shift in Eurasian energy security. The third chapter will

initially assess the impacts of LNG and shale gas on Russia’s domestic energy industry

and how an emerging international gas market will alter Russia’s relations with Europe,

14

the Caspian Basin, and China. Then the future of the Caspian region, traditionally viewed

as a key to energy security, will be explored. Finally, the chapter will examine how

natural gas innovations provide a significant incentive for EU internal market integration,

which will lead to an investigation of future energy relations between the EU, Russia, and

the Caspian hydrocarbon states in transition to the conclusion of the thesis.

15

II. THE CONTEMPORARY EURASIAN ENERGY BRIDGE

Europe predominantly relies on Russian pipelines to meet its natural gas needs,

but this delivery method is rife with energy instability. The vulnerability of pipeline

delivery was exposed by the 2007 gas disputes between Russia and Belarus and the 2006

and 2009 gas disruptions caused by pricing conflicts between Russia and Ukraine.31

Consequently, these energy clashes bolstered European Union (EU) and Russian

initiatives to foster energy security. European and Russian visions of energy security

converged with the construction of the Nord Stream pipeline that bypassed troubling

transit states, like Ukraine and Belarus, while reducing transit fees.32 Even though transit

instability was reduced, Nord Stream expanded Russia’s stake in European gas imports.

Russia’s dominant role in the EU’s import energy mix has led Brussels to

consider alternative supplies. Because the EU relies on pipelines to supply natural gas,

the closest alternative market lies in the Caspian region. This actuality has galvanized EU

support for developing a gas bulwark against Russia via the Nabucco pipeline. Russia,

however, has proposed the South Stream as a competitor.33 Despite proclamations from

Berlin and Moscow that both pipelines are mutually reinforcing, this chapter will show

that Nabucco and South Stream are competitive and the construction of either project will

negate the need for a second pipeline.34 More importantly, the Nabucco/South Stream

rivalry highlights the EU’s competitive disadvantage vis-a-vis Russia concerning

contemporary pipeline politics.

This chapter will examine the contemporary Eurasian energy bridge by opening

with an overview of Russian pipelines that supply Eurasian energy to Europe. After

exploring advantages and disadvantages of the current pipeline system, this chapter will

examine the Nord Steam pipeline as a lens for viewing geopolitical tensions of pipeline

31 Whist, Nord Stream: Not just a Pipeline, 14.

32 Institut Français des Relations Internationales, Oil and Gas Delivery to Europe, 8.

33 Ibid., 56.

34 “Merkel: Nabucco not Competing with Nord Stream,” Baltic News Service, July 16, 2009, accessed October 3, 2012, http://www.lexis-nexis.com/.

16

politics between Europe and Russian and among EU member states. In order to further

exploration of European-Eurasian energy relations, this chapter will review EU-Russian

competition in the Southern Gas Corridor through examination of the projected gas

market through 2035 to contend that EU energy demand does not require the Nabucco

and South Stream pipelines. This chapter will go on to compare the Nabucco and South

Stream projects, their proposed routes, consortium members, goals and motivations for

development, and challenges to development. Because South Stream is the project most

likely to be completed, the influence of this pipeline on exporters, transit states, and

customers will be explored as well. The chapter’s conclusion will examine how EU-

Russian competition in the southern gas corridor illustrates the EU’s inability to compete

with Russia in pipeline politics, developing the South Stream pipeline will not

significantly alter contemporary pipeline politics governing the Eurasian Energy Bridge,

and possible avenues for European energy diversity.

A. THE CONTEMPORARY EURASIAN PIPELINE BRIDGE

Eurasian pipeline network35 Figure 1.

35 “Russia: Key Facts/Pipelines,” BBC News, accessed September 27, 2012,

http://news.bbc.co.uk/2/shared/spl/hi/guides/456900/456974/html/nn4page1.stm.

17

Seven pipeline systems currently connect Russia with Central and Western

Europe. Three of these pipelines traverse Ukraine (Brotherhood, Polar Lights, and Trans-

Balkans) and provide 175 bcm/year capacity to Europe. These systems are all remnants

of the Soviet Pipeline grid built before 1991. Yamal-Europe is the second largest transit

pipeline through Belarus and Poland and provides 33 bcm/year of natural gas. Russia has

also constructed three direct pipeline projects—Finland connector, Nord Stream to

Germany, and Blue Stream to Turkey—that provide 20 bcm, 56 bcm, and 16 bcm of gas

per year, respectively.

Pipeline Route Operational

Date

2012

Capacity

Brotherhood/Union Russia/Ukraine/Central Europe Soviet Pipeline

Grid

130

Polar Lights Russia/Belarus/Ukraine/Europe Soviet Pipeline

Grid

25

Trans-Balkans Russia/Ukraine/Balkans Soviet Pipeline

Grid

20

Finland Connector Russia/Finland Extended 1999 20

Yamal-Europe Russia/Belarus/Poland/Europe 1999 33

Blue Stream Russia/Black Sea/Turkey 2002 16

Nord Stream Russia/Baltic Sea/Germany 2011 56

Table 1. Russia’s pipeline export infrastructure to Europe (in bcm)36

1. Advantages

Pipelines are often the favored transport method for natural gas because other

options, like LNG, require technical and expensive infrastructure investment. Lower

costs can be passed on to consumers via lower prices. Furthermore, overland pipelines

have a life-span of thirty-five to sixty years and lower maintenance requirements than


18

competing delivery methods.37 Thus, natural gas remains the most economical delivery

method up to 3,000 km before transport costs rise enough for LNG to compete.38 Europe

pipeline interconnectors have also served an important role in creating regional

competitiveness by enabling reversible gas flows to offset gas disruptions and combining

energy resources from several importers to converge into one gas hub, creating a multi-

regional market. For example, the Bacton-Zeebrugge interconnector, an underwater

pipeline from the UK to Europe, has facilitated Russian, British and Norwegian gas

competition. Some believe interconnectors will be the vehicle to develop a unified EU

energy policy.39 Despite development in European interconnectors and economical gas

transport, pipelines deliver significant disadvantages.

2. Disadvantages

Even though pipeline interconnectors deliver supplies from multiple suppliers,

pipeline gas is still predominantly a regional market. Until alternative energy sources

provide a more dominant portion of Europe’s energy mix, pipeline gas remains a regional

market.40 Moreover, pipeline markets are subject to regional pricing, such as Russian’s

long-term purchase contracts. Regional gas prices are not related to supply or demand,

but are often linked to world oil prices. For example, the value of gas to Europe is

determined by the price of oil substitutes—called replacement value.41 Thus, European

gas prices cannot effectively react to supply and demand. Additionally, competition

between oil and gas resources cannot be harnessed because gas prices are linked to the oil

market.42 In addition to price constraints, contemporary pipelines may hobble political

action as well.

Russia’s history of using energy as a means of blackmailing Europe persists.

Some analysts affirm that Europe’s inaction during the 2008 Russo-Georgian war was

37 Ibid., 47.

38 Ibid.

39 Ibid., 53–54.

40 Ibid., 47.

41 Ibid., 50.

42 Ibid., 96.

19

due its reliance on Russian gas and fear of gas shutoffs as a reaction to political

opposition.43 A more recent example of EU-Russian political opposition is the current

European Commission (EC) anti-trust case against Gazprom. On September 4, 2012, the

EC opened an antitrust probe against Gazprom for three charges: “preventing gas trading

across national borders; hindering diversification of supply; and unfairly linking gas and

oil prices.”44 This action may seem like a positive step for unified EU energy relations

with Moscow. Yet, President Vladimir Putin responded by signing a decree on September

11th that prohibited “strategic firms” from providing information to foreign investigators

without Moscow’s permission. Consequently, Gazprom has stopped providing contract

details to the EC. Moves by the EC to liberalize and unbundle European pipeline

infrastructure from energy companies have met similar loggerheads. Lithuania is one of

the EU states that is most inclined towards unbundling, but has the highest gas prices in

Europe. Its current government is facing defeat in the upcoming October elections and

cites high gas prices as one of many examples of Russian meddling in Lithuanian

politics. On September 12, 2012, Russia informed Moldova—the poorest EU country—

that its gas rates would dramatically increase if the country did not renounce the EU’s

unbundling policies.45 Incidentally, French and German politicians and energy firms

have historically opposed EU unbundling efforts.46 Russia can make such demands and

may hold sway over larger EU nations because of its monopolistic positing as a gas

provider—especially in Eastern Europe.

43 Richard J. Anderson, “Europe’s Dependence on Russian Natural Gas: Perspectives and

Recommendations for a Long-Term Strategy,” George C. Marshall European Center for Security Studies, Occasional Paper series, No. 19 (September 2008), 41–2; Kenneth B. Medlock, Amy M. Jaffe, and Peter R. Hartley, Shale Gas and U.S. National Security (Houston: Rice University Baker Institute, July 2011), accessed October 2, 2012, http://www.bakerinstitute.org/publications/EF-pub-DOEShaleGas-07192011.pdf, 54.

44 “Burst Valves: The European Union Squeezes Gazprom. Russia Retaliates,” Economist, September 15, 2012, Section: Europe, 52.

45 Ibid.

46 “EU Tries—Again—to Split Utilities,” Bloomberg Businessweek, September 19, 2007, accessed October 2, 2012, http://www.businessweek.com/stories/2007–09–19/eu-tries-again-to-split-utilitiesbusinessweek-business-news-stock-market-and-financial-advice; Judy Dempsey, “Germans Attack EU Energy Proposal,” International Herald Tribune, 10 October 2007, F1.

20

Most European nations and international policy centers, including the

International Energy Agency (IEA), believe an undiversified energy supply is the

foundation of EU energy insecurity. While the EU produces one-third of its gas

domestically, the preponderance of gas supplies originate from three primary sources:

Russia provides over 40 percent of EU gas imports, while 23 percent originates in

Norway and 17 percent in Algeria.47 EU member states are aware of this reality. In

2011, The European Commission affirmed, “the security of the EU’s primary energy

supplies may be threated if a high proportion of imports are concentrated among

relatively few partners. Close to four-fifths of the EU-27’s imports of natural gas in 2009

came from Russia, Norway, or Algeria.”48 These apprehensions are rooted in several

Russian energy disputes in the first decade of the 21st Century. The 2006 Russia-Ukraine

gas disagreement halted the delivery of 100 million cubic meters of gas to Europe. In

2007, the Russian-Belarus energy clash direly affected Europe’s economy. Ukraine

subsequently siphoned gas from its pipeline to Europe in an attempt to hold European

households hostage during a row with Russia over gas prices in 2009.49 EU energy

security is likely to worsen as the EC forecasts its gas imports will increase to over 84

percent by 2030.50 Consequently, the EC has provided monetary and diplomatic support

to ten gas and electricity projects that were dubbed in “European interest.”51 One such

project is the Nord Stream pipeline.

B. NORD STREAM: RUSSIA’S TROJAN HORSE?

Although multiple energy disputes would seem like a boon for the Nord Stream

project, current political sentiment in the Baltic States, Belarus, Poland, Scandinavia,

47 Institut Français des Relations Internationales, Oil and Gas Delivery to Europe, 44; Kari Liuhto ed.,

The EU-Russia gas connection: Pipes, politics and problems (Turku School of Economics: Pan-European Institute, August 2009), 8, accessed October 2, 2009, http://www.tse.fi/FI/yksikot/erillislaitokset/pei/Documents/Julkaisut/Liuhto percent200809 percent20web.pdf, 96.

48 European Commission – Eurostat, “Energy production and imports,” September 2011, accessed September 1, 2012, http://epp.eurostat.ec.europa.eu/statistics_explained /index.php/Energy_production_and_imports.

49 Liuhto, The EU-Russia gas connection, 96.

50 Liuhto, The EU-Russia gas connection, 96.


21

Ukraine, and some European policy centers appear overwhelmingly opposed to Gazprom

fuel in the heart of Europe.52 Therefore, Nord Stream can serve as an effective case

study concerning the advantages and disadvantages of the contemporary Eurasian energy

bridge. To better appreciate the risks and rewards of this pipeline, a survey of the

arguments for and against the project will be presented.

1. Pipeline Proponents

On November 8, 2011, several European leaders attended the Nord Stream

pipeline’s opening ceremony. Chancellor Merkel, President Medvedev, French Prime

Minister Fillon, Dutch Prime Minister Mark Rutte, and the EU’s energy commission,

Günther Oettinger, all participated. As these leaders opened the pipeline, Russian natural

gas flowed directly from Vyborg, Russia, to Lubmin, Germany, via a 1,224 kilometer

conduit along the Baltic seabed bypassing the Baltic States, Belarus, Poland, and

Ukraine. The Nord Stream currently supplies over 55 bcm/year to the heart of Europe.53

The Nord Stream pipeline was named a “project of European Interest” by the EU

Commission, European Parliament, and Council of the European Union in 2006. Nord

Stream’s multinational consortium—comprised of Russia’s Gazprom, Germany’s

BASF/Wintershall and E.ON Ruhrgas, Dutch firm Nederlandse Gasunie, and France’s

GDF SUEZ—touted the project’s critical role in long-term European energy stability.

Additionally, the pipeline was constructed at no cost to taxpayers.54 Non-Former Soviet

Union (FSU) states may argue that Nord Stream is a sensible energy option because

transit state insecurity is relegated and economic interdependence with Russia reduces

future threats, but open support from politicians and the aforementioned EU agencies has

not erased the shadow over the Nord Stream project that has been present since Vladimir

52 Ibid., 71; Arne Schröer, “European Energy Security: A New Pattern of External Stability and

Internal Risks,” accessed October 2, 2012, http://www.aicgs.org/publication/european-energy-security-a-new-pattern-of-external-stablity-and-internal-risks/.

53 Nord Stream AG, “Nord Stream Pipeline Inaugurated: Major Milestone for European Energy Security,” accessed September 25, 2012, http://www.nord-stream.com/press-info/press-releases/nord-stream-pipeline-inaugurated-major-milestone-for-european-energy-security-388; Nord Stream AG, “The Pipeline,” accessed September 25, 2012, http://www.nord-stream.com/pipleline.

54 Nord Stream AG, “Nord Stream Pipeline Inaugurated.”

22

Putin and Gerhard Schröder announced the contract in 2005.55 Nord Stream’s role in

bolstering EU energy security has been eclipsed by concerns about the consequences of

increased reliance on Russian energy.

2. Arguments against Nord Stream

Myriad concerns permeate the Nord Stream debate. Some objections are

environmental, some are military in nature, such as Sweden’s reservations that Nord

Stream may further contaminate the already polluted Baltic and the pipeline may stymie

European investment in renewable energy. Additionally, the Scandinavian states fear a

Russian military presence in their territorial waters under the guise of military protection

of Russia’s strategic energy investment.56 Yet, several European Union members are

apprehensive about Russia’s increased potential to leverage energy exports and the

undermining of EU solidarity.

Even though some perceive Russia as unscrupulous in the ways it provides

energy, Europe’s energy insecurity does not derive from the nationality of its providers,

but from the concentration of its energy suppliers. As of 2009, dependence on Russian

energy in Finland, Latvia, Lithuania, and Slovakia was absolute as these nations received

100 percent of their natural gas from Russia. Austria, the Czech Republic, Hungary, and

Greece purchased 75 percent of their energy from Russia, while Poland, Romania, and

Slovenia were dependent on Russia for over 50 percent of their energy.57 Thus, Nord

Stream amplifies Russia’s near-monopolistic power by giving Moscow the ability to

restrict gas flows to the Baltic states, Belarus, Poland, and Ukraine without interrupting

energy supplies to Germany and Western Europe—Russia’s largest customers.

Furthermore, the Kremlin has a history of linking gas prices to political subservience.

This linkage is observable in the recent interaction between Russia, Moldova and

Lithuania cited above. Some analysts forecast increased Russia’s energy influence in

Western Europe via planned pipeline connectors reaching Denmark, the Netherlands, and

55 Nord Stream AG, “Nord Stream Pipeline Inaugurated;” Nord Stream AG, “The Pipeline.”

56 Larsson, Nord Stream, Sweden and Baltic Sea Security, 7.

57 Fernández, “The EU and Natural Gas from Central Asia: Is Nabucco the Best Option?” 1.

23

the United Kingdom—states that currently do not receive Russian gas.58 As EU

dependence on imported gas grows to over 80 percent and production in the North Sea

decreases by 40 percent before 2020, the EU may find itself the victim of Russian energy

blackmail.59

Poland and other EU member states fear the influence that Russia could gain

through a Russo-German energy entente. Russia’s Gazprom owns 51 percent of the Nord

Stream pipeline; thus, Moscow potentially controls the flow of gas into Germany.

Additionally, Gazprom’s status as a domestic monopoly may limit German companies’

ability to negotiate prices or quantities. Nord Stream’s registration in Switzerland also

prevents Germany from gaining insight into the consortium’s activities. Russia has the

ability to control downstream actions of German companies or German infrastructure

itself via its major stake in the consortium.60 Therefore, Moscow’s battle against EU

unbundling is an effort to retain Gazprom’s controlling stake in European downstream

projects. Some European policy analysts question Nord Stream’s economic viability and

conclude that it is primarily a political project between Russia and Germany at the

expense of the Federal Republic of Germany’s smaller neighbors to the east.61

Nord Stream is a poignant reminder that bilateralism is still prevalent in the

European Union, especially concerning energy and Russia. Thus, the real peril of Nord

Stream may not be increased Russian influence, but demoralized EU political solidarity

and reinvigorated Russian motivation to follow a divide-and-coerce foreign policy. A

unified EU could have pressured Russia to develop additional overland pipelines through

58 Larsson, Nord Stream, Sweden and Baltic Sea Security, 7; International Energy Agency, “World

Energy Outlook 2009,” accessed January 25, 2012, http://wordenergyoutlook.org/docs/weo2009/WEO2009_es_english.pdf, 7.

59 Laura Solanko and Pekka Sutela, “Too Much or Too Little Russian Gas to Europe?,” Eurasian Geography and Economics 50, no. 1 (2009), accessed January 25, 2012, http://bellwether.metapress.com/content/2u32132761116518/fulltext.pdf, 59; Baker Institute for Public Policy, “Shale Gas and U.S. National Security,” 11.

60 BBC News, “Nord Stream Gas Pipeline Underwater Construction Starts,” (BBC News, April 9, 2010), accessed September 15, 2012, http://news.bbc.co.uk/2/hi/business/8607214.stm; Keith C. Smith “Lack of Transparency in Russian Energy Trade,” 4 & 15.

61 Larsson, Nord Stream, Sweden and Baltic Sea Security, 7–8; Institut Français des Relations Internationales, Oil and Gas Delivery to Europe, 77; Alexander Ghaleb, “Natural Gas as an Instrument of Russian State Power,” 67.

24

the Baltic countries or Poland thereby increasing capacity from Russia, while negotiating

a competitive price. Moreover, overland pipelines would have cost less than the Nord

Stream project and could have increased revenues via transit fees to bolster the

economies of Latvia, Lithuania, and Poland. Yet, the pursuit of European “energy

nationalism” squandered this opportunity to develop a non-divisive pipeline project and

foster EU unity.62 Although Nord Stream has been operational since November 2011

and the Nord Stream Consortium opened the second pipeline in late 2012, this project

only supports one pillar of EU energy security—reducing transit state instability.

C. EU-RUSSIAN ENERGY COMPETITION IN THE SOUTHERN GAS

CORRIDOR

Gazprom is still the largest importer of gas to Europe; approximately 40 percent

of EU gas imports come from Russia.63 Therefore, Europe is still at risk of Russian

energy blackmail and additional infrastructure projects are necessary to diversify gas

supplies away from Russia. The Nabucco pipeline is one of the key projects that the EU

supports financially and diplomatically to weaken Russia’s monopolistic power.64 Yet,

Russia has countered the Nabucco pipeline with its South Stream project through the

Black Sea. Despite proclamations from the Berlin and Moscow that both pipelines are

mutually reinforcing, this section will show that Nabucco and South Stream are

competitive and the construction of either project will negate the need for a second

pipeline.65 Moreover, the Nabucco/South Stream rivalry highlights the EU’s inability to

complete with Russia in contemporary pipeline politics.

62 Larsson, Nord Stream, Sweden and Baltic Sea Security, 7; Anderson, “Europe’s Dependence on

Russian Natural Gas,” 42; Larsson, Nord Stream, Sweden and Baltic Sea Security, 7–8; Institut Français des Relations Internationales, Oil and Gas Delivery to Europe, 77.

63 Arne Schröer, “European Energy Security.”

64 Ariel Cohen, “Russia: The flawed Energy Superpower,” 165.

65 “Merkel: Nabucco not Competing with Nord Stream,” Baltic News Service.

25

Gas networks of Central Asia66 Figure 2.

1. Competing Pipelines?

Germany and Russia, the heavyweight political leaders in the Nabucco and South

Stream pipelines projects, respectively, both contend that these pipelines can serve

mutually reinforcing purposes. German Chancellor Angela Merkel confirmed in a 2009

press conference that Nabucco is not intended to threaten Russia’s Nord Stream and

South Stream projects, “We need not treat it as some kind of antagonism to other

pipelines.”67 While then-President of Russia Dmitri Medvedev supported Merkel’s

statement, affirming, “We do not have the least envy with respect to Nabucco; let it

develop on its own. If gas starts moving via Nabucco, someone consequently needs it.”68

At the political level, both states support the projects and affirm their cooperative efforts.

This amicable viewpoint is echoed at the industry level.

The mutual benefits of Russia’s South Stream and the EU-backed Nabucco

pipelines was extolled at the 24th World Gas Conference held in 2009 at Buenos Aires.

66 “Struggle for Central Asian Energy Riches,” BBC News, June 2, 2010, accessed September 12,

2012, http://www.bbc.co.uk/news/10213792.

67 “Merkel: Nabucco not Competing with Nord Stream,” Baltic News Service.

68 Ibid.

26

At this industry conference, the Hungarian office of Klynveld Peat Marwick Goerdeler

(KPMG)—a global accounting and advisory service company—presented an analysis of

the Nabucco and South Stream projects. In this report, the authors explained that without

support from South Stream, Nabucco will only be able to meet European demand through

2016. The report further explained that South Stream could only provide adequate supply

through 2020. Consequently, Nabucco and South Stream—in tandem—could provide 93

billion cubic meters (bcm) per year, over one-third of the total demand in Central and

Eastern Europe (CEE), and supply CEE through 2026. Yet, the report highlights a

possible motivation for proposing both projects, “This way the natural gas demand of the

CEE could be satisfied until 2026 without raising the need for further infrastructural

development.”69 It is possible that KPMG and Russia may support the Nabucco project to

keep Europe from investing in technologies, like liquefied natural gas (LNG) terminals,

that could truly diversify sources from Russia or CIS nations. The report asserts, “As

Nabucco and South Stream projects are designed to bridge a distance of less than 4,000

km passing mainly overland…LNG technology would be of limited interest.”70 Still, the

Kremlin claims it is not worried about Europe’s move to diversify. According to

Gazprom’s Deputy CEO Alexander Medvedev, “Even if we count in the gas volumes

supplied to Europe through Nord Stream, South Stream, Nabucco, and LNG supplies,

Europe will still have a supply deficit of 15–20 billion cubic meters/year.”71 Yet,

Gazprom’s and KPMG’s claims are based on inaccurate demand forecasts.

The Gazprom and KPMG assessment are based on the assumption that European

demand for Central Asian gas will require 31 bcm/year by 2020 and demand will

continue to grow at a steady rate.72 The initial demand assessment appears to be

validated by the International Energy Agency (IEA), which forecasted in the World

Energy Outlook 2011, gas flows through the southern corridor will reach 34 bcm/year by

69 Rolan Lajtai, Annamária Czinkos, and Tamás Dinh, “Nabucco vs. South Stream: The Effects and

Feasibility in the Central and Eastern European Region,” 24th World Gas Conference, Buenos Aires, Argentina (KPMG in Central and Eastern Europe, October 5–9, 2009), 11, 15, and 31.

70 Ibid., 11.

71 Nadio Rodova and Dina Khrennikova, “Turkey Approves South Stream Construction,” Platts Oilgram News, December 29, 2011, Section: Europe, Middle East and Africa, vol 89, no. 256.

72 Lajtai et al., “Nabucco vs. South Stream,” 11.

27

2020; however, the IEA foresees southern gas flows declining to 31bcm/year in 2035 due

to Europe’s clean energy policies and investment in energy efficient technologies.73

Despite supporting both pipelines as the best option for Europe’s long-term energy

future, KPMG’s report admits the 93 bcm capacity of both pipelines exceeds demand in

in the CEE region, which will likely lead to “unused pipeline capability” or “competition

between Nabucco and every other Eastern pipeline.”74 Not only do Nabucco and South

Stream compete to meet European demand, but both projects contend for transit states

and supply sources as well.

Enroute to their destinations in Central Europe, the South Stream and Nabucco

project overlap in several transit states, which are also gas customers. Three of five

Nabucco transit states—Bulgaria, Hungary, and Austria—also comprise part of the

proposed South Stream route. Thus, both pipelines will not only be competing for energy

customers, but also for funding to develop the transit infrastructure in these three

countries.75 Yet, the most significant competition between Nabucco and South Stream is

for supplier countries. The South Stream consortium effectively targeted Nabucco’s

potential supply base by locking in long-term supply contracts before the Nabucco

consortium was able to negotiate energy deals.76 Furthermore, some of the supply

contacts secured by Russia and the European Union may not be feasibly fulfilled by

supplier nations. For example, Turkmenistan already supplies pipelines to Russia, Iran,

and China, but is also contemplating projects to increase gas flows to Russia and Iran,

while supporting the trans-Caspian portion of the Nabucco pipeline. Ariel Cohen argues

that Turkmenistan does not have the gas reserves to supply these competing projects,

which brings Nabucco and the South Stream into direct competition for Turkmen gas.77

While rivalry between the two pipelines may seem like positive news for customers,

73 International Energy Agency, World Energy Outlook 2011 (Paris: 2011), 343.


75 Ibid., 26; Fernández, “The EU and Natural Gas from Central Asia: Is Nabucco the Best Option?” 6.


77 Ariel Cohen, “Energy Security in the Caspian Basin,” in Energy Security Challenges for the 21st Century: A Reference Handbook, ed., Gal Luft and Anne Korin (Washington, D.C.: Library of Congress Cataloging-in-Publication Data, 2009), 115.

28

whom may benefit from lower prices, the likely outcome is that duplication of supply

sources, transit states, and customers creates the foundation for economically unviable

pipeline projects.78 Therefore, the pipeline that is sourced and funded first will likely

render the competing pipeline obsolete. Consequently, examining the feasibility of each

pipeline is essential to understanding which project will likely span the Southern Gas

Corridor and the geostrategic implications of this pipeline’s development.

2. Nabucco: “The New Gas Bridge from Asia to Europe”

The Nabucco consortium—comprised of OMV (Austria), MOL (Hungary),

Bulgargaz (Bulgaria), Transgaz (Romania), BOTAS (Turkey), and RWE (Germany)—

hail this pipeline “the new gas bridge from Asia to Europe.”79 Although the Nabucco is

currently planned to span 3,300 kilometers from Erzurum, Turkey—fed by the Baku-

Tbilisi-Erzurum (BTE) gas pipeline—to Austria by transiting Bulgaria, Romania, and

Hungary, this project will not reach Asian gas supplies.80 Yet, the United States has used

diplomacy in an attempt to recruit Kazakhstan into the project, and the EU has sent

delegations to secure Turkmen gas supplies to feed a trans-Caspian section of the

Nabucco pipeline to the BTE terminal in Baku, Azerbaijan.81 Not only would Central

Asian contributions to the Nabucco support a true Asian-European gas bridge, but these

sources are essential to the viability of the pipeline, which will be examined in more

detail below. Nevertheless, the Nabucco consortium has deftly provided maneuvering

room concerning the pipeline route by proposing a streamlined option dubbed “Nabucco

West,” which begins at the Turkish-Bulgarian border and transports a diminished amount

78 Fernández, “The EU and Natural Gas from Central Asia: Is Nabucco the Best Option?” 6; Mankoff,

“Eurasian Energy Security,” 19.

79 Nabucco Gas Consortium, “Overview,” accessed September 12, 2012, http://www.nabucco-pipeline.com/portal/page/portal/en/pipeline/overview; Fernández, “The EU and Natural Gas from Central Asia: Is Nabucco the Best Option?” 1.

80 Nabucco Gas Consortium, “Route,” accessed September 12, 2012 http://www.nabucco-pipeline.com/portal/page/portal/en/pipeline/route; Lajtai et al., “Nabucco vs. South Stream,” 8.

81 Mankoff, “Eurasian Energy Security,” 23–24.

29

of gas—10 to 23 bcm/year opposed to 31 bcm/year originally promised—to European

customers.82

a. Rationale

As four of the consortium companies are headquartered in EU member

states and Turkey is an aspiring EU member, the EU supports this pipeline and has

selected it as a priority project by providing EU 200 million towards the first construction

stage.83 The key EU motivation for supporting this project is to reduce Russia’s

dominance over Europe’s natural gas market. Russia is Europe’s largest gas importer

(39.1 percent), followed by Norway (23.5 percent), North Africa (11.6 percent), and LNG

imports (9.9 percent). Moreover, much of Central and Eastern Europe is wholly

dependent on Russia for natural gas.84 During Moscow’s January 2009 gas dispute with

Kiev over gas pricing and Ukrainian Naftogaz’s debt to Gazprom, daily gas flow to

Europe reduced from 225 cubic meters to 40 cubic meters amid a severe cold spell.85

This event was a poignant reminder of Europe’s dependence and vulnerability. At the

time of this dispute, ninety percent of Russian gas exports to Europe flowed through

Ukraine. This incident spurred European investment in the Nord Stream and Nabucco

pipelines to eliminate transit choke points, but the EU has rallied behind the Nabucco

project to invest in an alternative to Russian gas.86 Therefore, Brussels views both

Russia and Ukraine as sources of instability and future gas disruptions. Incidentally, one

of the most determined supporters for development of the Southern Gas Corridor has not

been a European country, but the United States.

While the United States primarily invested in crude oil infrastructure in

the Southern Gas Corridor, U.S. diplomacy was central to the completion of the BTE or

82 Nabucco Gas Consortium, “Overview;” Nabucco Gas Consortium, “Route;” Lajtai et al., “Nabucco

vs. South Stream,” 8.

83 Lajtai et al., “Nabucco vs. South Stream,” 8–9.

84 Ibid., 4.

85 “European Gas Supply Disrupted,” BBC News, Jan 6, 2009, accessed September 13, 2012, http://news.bbc.co.uk/2/hi/europe/7812860.stm.

86 Ibid., 30–31,

30

South Caucuses gas pipeline, which is an essential energy source for Nabucco.87

Washington diplomatically supports Nabucco as a method for the EU to decrease

dependence on Russian energy supplies. U.S. strategy is focused on diminishing Russia’s

coercive influence on its CEE NATO allies. Gazprom’s monopolistic position, especially

in Eastern Europe, is even viewed by some as a threat to NATO’s decision making

process.88 Russia has the potential to exert political influence in NATO member states

with threats of gas shutoffs, which could influence how NATO members vote on military

and humanitarian interventions or even internal policies. Thus, developing an alternative

gas bridge to Central and Eastern Europe provides these nations an option for avoiding

Russian gas cutoffs. Additionally, the United States not only seeks to diminish Russian

coercion in Europe, but desires to limit Moscow’s influence in its near abroad. By

promoting western investment in the Caspian Basin, Central Asian and South Caucus

states are given an alternative hydrocarbon customer to Russia. Furthermore, Gazprom’s

ability to demand below market prices will be eroded, which has already started due to

China’s entrance into Central Asia.89 Yet, hydrocarbon development in the Caspian

Basin is not a simple process of applying free market principles. Several significant

geopolitical factors preclude Nabucco’s development.

b. Challenges

Geography is one of the first challenges to Nabucco’s construction.

Although access to Caspian and Central Asian energy reserves was the original

justification for the Nabucco pipeline, these supply sources have not materialized.90 In

order to transit natural gas beneath the Caspian Sea, the littoral states—including

Russia—must reach an agreement on the division of the waters and seabed, which has

been a legal issue since the collapse of the Soviet Union. Conversely, piping Central

Asian natural gas to China and Russia is less risky and less expensive than the undersea



89 Dmitri Trenin, Post-Imperium: A Eurasian Story (Washington, D.C.: Carnegie Endowment for International Peace, 2011), 171; Mankoff, “Eurasian Energy Security,” 18.


31

or LNG tanker methods required to reach European markets directly.91 Turkey presents

another geopolitical factor in the Nabucco equation. If this pipeline is realized, Turkey

will become a natural bottleneck in the Southern Gas Corridor, akin to Belarus and

Ukraine—albeit not as powerful. Thus, the EU’s desire to reduce transit instability will

not be fully achieved through the construction of the Nabucco pipeline.

In addition to geopolitical issues, Nabucco requires adequate funding to

reach fruition. According to Jeffrey Mankoff’s July 2012 assessment, the Nabucco is still

severely underfunded.92 Moreover, western firms are at a disadvantage when competing

with Russian and Chinese firms, especially in Central Asia, due to lack of guaranteed

state financing.93 Brussels is further hindered in Central Asian dealings because

Ashgabat tends to favor bilateral negotiations over engaging multilateral frameworks.94

Due to lack of investment in the Nabucco project, the pipeline consortium and western

politicians may not be able to secure energy deposits in Turkmenistan if they cannot

convince Ashgabat that Turkmen gas will reach European markets. Moreover, the 2008

Russo-Georgian War, which caused British Petroleum to shutdown pipeline operations

for forty-eight hours, led to perceptions of regional instability, and reduced western

financial support for developing the Southern Gas Corridor.95 Thus, the Nabucco

consortium is not likely to muster sufficient funds unless the European Union provides

substantial financial support.96

Despite its economic shortfalls, the Nabucco consortium’s most

significant challenge is securing energy supplies. As of yet, there is no determined gas

source to supply Nabucco. Kazakhstan, Turkmenistan, Azerbaijan, Egypt, and Iraq have

91 Cohen, “Energy Security in the Caspian Basin,” 112 & 121.


93 Ibid.

94 Kirsten Westphal, “Competition for Energy Resources. Market and Power in Central Asia,” Osteuropa 57, no. 8–9 (2007): 463.

95 Mankoff, “Eurasian Energy Security,” 24; The International Institute for Strategic Studies, “Europe’s Energy Dependence: Risks Heightened after War,” Strategic Comments 14, no. 7 (September, 2008), accessed September 12, 2012, http://www.iiss.org/publications/strategic-comments/past-issues/volume-14–2008/volume-14-issue-7/europes-energy-dependence/.


32

all been named as potential sources for the Nabucco pipeline, but only Baku has formally

committed significant gas resources to this project.97 While there is concern that

Turkmenistan may not be able to produce enough gas to support Russia, China, and trans-

Caspian gas projects to the west, an oil advisory company— Gaffney Cline &

Associates—confirmed in a 2008 study that Turkmenistan does possess sufficient natural

gas deposits to support increased exports to Russia, Europe’s Nabucco, and the

Turkmenistan-China gas pipeline.98 However, the vital concern should not be the amount

of Turkmen gas, but Ashgabat’s political will to support Nabucco.

In May 2007, Turkmenistan signed an agreement with Kazakhstan and

Russia to provide an additional 30 bcm/year to Russia via a new pre-Caspian pipeline.

This project will allow Russia to meet future EU energy demand. Moreover, the 30

bcm/year supplied by the pre-Caspian pipeline matches the entire projected capacity of

the Nabucco pipeline, which has created viability and investment issues for Nabucco.

While the Nabucco consortium has yet to secure Turkmen gas supplies, the pre-Caspian

pipeline feasibility study is complete and the pipeline contract is undergoing draft

negations. Thus, the pre-Caspian project appears to be a higher priority than Nabucco in

Ashgabat.99 Because Central Asian gas exporters have not supported Nabucco,

European leaders and consortium members have suggested Iranian resources to make

Nabucco economically viable.100 Yet, the EU’s support of UN sanctions against Iran

renders Tehran’s inclusion unlikely in the short-term. Furthermore, Iran’s increasing

domestic demand places its potential export quantities on a diminishing curve.101

Incidentally, Gazprom has even tried to enter the Nabucco consortium, which would be a

boon to the project, but defeat Nabucco’s purpose of diversifying away from Russian


98 Cohen, “Energy Security in the Caspian Basin,” 115; Philip Shishkin, “Central Asia’s Crisis of Governance,” Asia Society, January 2012, 19, accessed September 5, 2012, http://asiasociety.org/files/pdf/120215_central_asia_crisis_governance.pdf.

99 Mankoff, “Eurasian Energy Security,” 19–21, 24; Lajtai et al., “Nabbuco vs. South Stream,” 31; Gazprom, “Pre-Caspian gas pipeline,” accessed September 12, 2012, http://gazprom.com/about/production/projects/pipelines/pg/.



33

gas.102 In 2010, Turkish Prime Minster Recep Tayyip Erdoğan summarized Nabucco’s

dilemma best: “The Nabucco pipeline needs 30 billion m3 (cubic meters) of natural gas

every year. Could Nabucco find such a supply at the moment? No, it could not. There is

no gas. There is no pipeline. So what are we talking about?”103 Consequently, Nabucco’s

construction has been pushed to 2013, and gas is not set to flow (initially 6 bcm) until

2017.104 Conversely, the South Stream Consortium has schedule pipeline construction

for early 2013 and projects 16 bcm/year of gas by 2015 and full 63 bcm/year capacity by

2018.105 South Stream’s progress does not bode well for Nabucco’s future.

3. South Stream: “Energizing Europe”

South Stream is currently planned to span 3,700 km from the Russian

Federation—with a 900 km portion under the Black Sea—through Central Europe into

Germany. A separate 100 km offshoot is planned through Greece—under the Adriatic

Sea—to Italy. South Stream would traverse seven transit countries (Bulgaria, Serbia,

Hungary, Austria, Slovenia, Greece, and Italy) that have all already pledged official

participation in the project.106 Additionally, Turkey agreed in December 2011 to allow

Russia to build the Black Sea portion of this pipeline in its territorial waters. Despite a

preponderance of EU member states, Brussels is not expected to provide any financing to

this project due to Russia’s dominant stake in the consortium.107

South Stream’s financing follows separate frameworks for transit infrastructure

and offshore pipelines. For overland routes, Gazprom and transit states will provide joint

financing (50–50) for the pipelines that traverse their territories, and Russia and Italy will

equally share the costs of the Adriatic pipeline. Concerning the offshore section through

102 Ibid.

103 “Questions about Viability of Nabucco Pipeline,”Euronews, January 30, 2010, accessed September 12, 2012, http://www.euronews.com/2010/01/30/questions-about-viability-of-nabucco-pipeline.

104 Sebastien Peyrouse, Turkmenistan: Strategies of Power, Dilemmas of Development (Armonk: M.E. Sharpe, 2010), 187; Nabucco Gas Consortium, “Timeline,” accessed September 12, 2012, http://www.nabucco-pipeline.com/portal/page/portal/en/pipeline/timeline_steps.

105 Nabucco Gas Consortium, “Timeline.”

106 Lajtai et al., “Nabucco vs. South Stream,” 9 & 11.

107 Ibid., 9; Rodova “Turkey Approves South Stream Construction.”

34

the Black Sea, a consortium of all private investors has been established. The South

Stream consortium is comprised of Russia’s Gazprom (50 percent), Italy’s Eni S.p.A (20

percent), France’s EDF (15 percent), and Germany’s BASF Wintershall (15 percent).

Therefore, the offshore section will be created at no cost to European taxpayers.108

South Stream’s participating states are set to make their final investment decisions in late

2012, and construction is forecasted to begin in early 2013. Moreover, 16 bcm of natural

gas is scheduled to flow in late 2015. By early 2017, South Stream is forecasted to

provide 31.5 bcm, while Nabucco is projected to produce only 6 bcm starting in 2017.109

a. Rationale

In spite of South Stream’s benign motto, “Energizing Europe,” several

analysts believe Russia’s primary motivation is to further its perceived opaque designs in

international relations. Alexander Ghaleb argues that Russia seeks to use natural gas “as a

weapon with which to reestablish dominance throughout the territory of the former Soviet

Union and to reassert its primacy over both the energy-producing states of Central Asia

and energy consuming states in Europe.”110 He further states that South Stream

reinforces the Kremlin’s ultimate foreign policy tactic in Europe—divide and rule—by

enabling Moscow to turn off the gas to the Baltic States, Belarus, Poland, and Ukraine,

without affecting its largest customers in Europe.111 Paul Domjan and Matt Stone,

Eurasian energy analysts and consultants, agree that South Stream is primarily fueled by

the Kremlin’s interest to reassert geopolitical power over Central Asia and its European

energy customers.112 Ariel Cohen argues that this desire for dominance was manifested

in the 2008 Russo-Georgian war, and Russia’s declarations of independence for South

108 Lajtai et al., “Nabucco vs. South Stream,” 9–10; South Stream Transport AG, “Fact Sheet,”

accessed September 12, 2012, http://www.south-stream-transport.com/media/documents/pdf/en/2012/06/ssttag_south-stream-offshore-pipeline-fact-sheet_5_en_20120620.pdf.

109 Rodova, “Turkey Approves South Stream Construction;” South Stream Transport AG, “Fact Sheet.”


111 Ibid., 117.

112 Paul Domjan and Matt Stone, “A Comparative Study of Resource Nationalism in Russia and Kazakhstan 2004–2008,” Europe-Asia Studies 62, no. 1 (January 6, 2010): 39.

35

Ossetia and Abkhazia were crafted to give Russia control over the overland export routes

from Central Asia to Europe.113 At first glance, Russia’s Energy Ministry supports these

hypotheses. In the “Energy Strategy of Russia for the period up to 2030,” the Russian

Energy Ministry affirms, Russia “provides 25 percent of the world trade in natural gas,

dominating both on the European gas market and on the gas market of the

Commonwealth of Independent States.”114 If the Kremlin’s goal is to maintain energy

dominance, then Russia would be required to block the development of alternative

pipeline projects in the Southern Gas Corridor.

There is evidence of Russia’s desire for dominant influence over the

Eurasian energy bridge. The Russian Energy Ministry states, “Russian pipeline

infrastructure will become an integral part of the power bridge between Europe and Asia,

and Russia will become the key center of its management.”115 Russia has prevented

Kazakhstani companies from signing contracts with western firms and blocked Caspian

seabed delineation to prevent gas exploration and transport from Central Asia, through

the South Caucus BTE pipeline, to Europe.116 Consequently, Cohen affirms Russia is

developing the South Stream to block the development of the Nabucco pipeline.117

Rafael Fernández agrees that Moscow’s 2007 formal announcement for the South Stream

project was a direct reaction to the U.S.-backed BTE pipeline ground breaking in 2006,

which brought Nabucco one-step closer to realization.118 While Russia’s statements and

actions denote aggressive energy policies focused on maintaining geopolitical influence,

market forces also drive Gazprom’s managers and executives.

113 Cohen, “Russia: The Flawed Energy Superpower,” 92 & 94.

114 Ministry of Energy of the Russian Federation, “Energy Strategy of Russia for the period up to 2030,” November 13, 2009, accessed September 12, 2012, http://energystrategy.ru/projects/docs/ES- 2030_(Eng).pdf, 21.

115 Ibid.

116 James Nixey, “The Long Goodbye: Waning Russian Influence in the South Caucasus and Central Asia,” Chatham House Briefing Paper, accessed September 12, 2012, http://www.chathamhouse.org/sites/default/files/public/Research/Russia percent20and percent20Eurasia/0612bp_nixey.pdf, 12.

117 Cohen, “Russia: The Flawed Energy Superpower,” 91.


36

The greatest advantage of the South Stream project is that Russia’s

reliance on Ukraine as a transit state is significantly reduced. Before the development of

the Nord Stream pipeline, ninety percent of all Russian gas exports to Europe transited

through Ukraine.119 Russia’s energy ministry affirms that the main risks in the energy

field are Russia’s dependence on transit countries for export and insufficient

diversification to consumer markets. Thus, South Stream is one of the most important

Russian energy projects not only because it bypasses Ukraine, but also because it

diversifies Russian energy exports to reliable customers—namely Germany and Italy,

which are the first and second largest EU gas importers.120 While Alexander Ghaleb

claims profitability was not a key factor in developing South Stream, Jeffrey Mankoff

offers a more nuanced analysis, “Even if the initial cost of building undersea pipelines is

higher than building overland, with Nord and South Stream, Gazprom would be freed

from having to pay transit fees, which are the largest single operating expense.”121

Another advantage of the Black Sea pipeline is that Turkey’s influence as an energy

transit state will be diminished. Greece, Bulgaria, and Hungary all welcome the South

Stream as an option to decrease reliance on Turkey as a transit state, which Nabucco

would amplify.122 Thus, South Stream is not solely a tool of Russian dominance, but a

confluence of economic and geopolitical interests in Russia and Europe.

b. Challenges

South Stream faces two significant hurdles compared to the Nabucco

project. First, South Stream includes two undersea portions and is more technologically

risky than Nabucco; however, Gazprom has recently completed seabed pipelines for the

Nord Stream and is likely to use the expertise gained from this construction project for

the South Stream as well. Incidentally, Nabucco will not be viable unless an undersea or

119 Ghaleb, “Natural Gas as an Instrument of Russian State Power,” 84; Lajtai et al., “Nabbuco vs.

South Stream,” 9.

120 Ministry of Energy of the Russian Federation, “Energy Strategy of Russia” 56 & 61; Mankoff, “Eurasian Energy Security,” 15; Fernández, “The EU and Natural Gas from Central Asia: Is Nabucco the Best Option?” 2.

121 Ghaleb, “Natural Gas as an Instrument of Russian State Power,” 67; Mankoff, “Eurasian Energy Security,” 15.


37

LNG portion of the energy bridge is built to Central Asia.123 Second, building the South

Stream pipeline will cost twice as much as Nabucco, which may render South Stream’s

construction financially prohibitive. If completed, Nabucco will cost $3.5 million per

kilometer and South Stream (with 30 bcm capacity) will cost $6.7 million to $8.4 million

per kilometer.124 Yet, the Kremlin is financing the majority of South Stream’s costs,

which could bode well or ill for this project.125

Due to reduced Russian energy profits stemming from the 2009 global

financial downturn, Gazprom may not be able to shoulder the South Stream burden.

Gazprom is the most indebted company in Russia and currently has several major

projects under construction, including the second Nord Stream pipeline and the Yamal II

through Belarus, in addition to gas field exploration and expansion of export routes from

Central Asia. Due to shared transit states with the Nabucco pipeline, Central and Eastern

European nations may not be able to handle an additional financial burden if Gazprom

defaults on its obligations.126 Yet, increasing financial support from transit states and

consortium partners would decrease Gazprom’s controlling stake in the project. This

outcome is not palatable to the Kremlin’s strategy of controlling downstream resources;

thus, Moscow will likely muster the political will to fulfill Gazprom’s obligations if

South Stream breaks ground. Incidentally, the greatest stumbling block to South Stream’s

realization is Russia itself.

Prior to the 2009 gas war with Kiev, Gazprom sought to take control of

the export routes through Ukraine. After this crisis, Russia’s negotiations with Ukraine

intensified. As South Stream approaches construction, Moscow’s leverage vis-à-vis Kiev

grows. If Kiev agrees to allow Gazprom to control the gas routes to Europe and

guarantees not to disrupt gas flows, Ukraine’s liability as a transit risk significantly

decreases. Furthermore, Russia is likely to dissolve the costly undersea pipeline project

because its greatest energy security concern will be met, rendering South Stream




126 Lajtai et al., “Nabucco vs. South Stream,” 10 & 31.

38

irrelevant.127 If Gazprom secures control of Ukraine pipelines and South Stream is

halted, Russia may continue to build a pipeline from Eastern Europe—below the

Adriatic—to Italy. If South Stream is cancelled, overdue upgrades to the Soviet-era

infrastructure that traverses Ukraine will be required. Despite negotiations between

Ukraine and Russia, Kiev has responded to Moscow’s interludes by proposing a joint

EU-Gazprom venture to control and modernize its pipeline routes. This concession will

not likely meet Moscow’s demands; therefore, South Stream appears a likely reality as

construction of the Black Sea pipeline is scheduled for early 2013.

4. Implications of South Stream’s Probable Development

One immediate impact of developing South Stream is Russia’s diminished need

for transit states. Once fully operational, South Stream and Nord Stream will supply 118

bcm/year of Russian gas to Europe. In 2010—before the Nord Stream was operational—

Ukraine only transited 99 bcm/year of Russian gas to Europe. In addition to losing

billions of dollars in transit fees every year, South Stream could render Ukrainian transit

infrastructure obsolete.128 Additionally, the IEA interprets Russia’s recent energy

projects as “a major shift in the pattern of gas flows” that will impact not only Ukraine,

but Belarus, the Czech Republic, Poland, and Slovakia as Russia bypasses former Soviet

states.129 The Nord Stream and South Stream developments have led to concerns that

Russia is building a system to increase its leverage in Eastern Europe without affecting its

largest customers in Central and Western Europe.

In addition to reasserting its predominate position in post-Soviet spaces, it is

feared that Moscow will use its energy monopoly to influence EU foreign policy and

even NATO decision making.130 Some argue that market forces have weakened Russia’s

ability to use energy as a political weapon. For example, as result of the 2008 global

economic downturn, European demand for natural gas decreased in 2009. This trend

127 Ibid., 9 & 31; Rodova, “Turkey Approves South Stream Construction.”

128 Rodova, “Turkey Approves South Stream Construction.”

129 International Energy Agency, World Energy Outlook 2011, 337.

130 Cohen, “Russia: The Flawed Energy Superpower,” 105; Ghaleb, “Natural Gas as an Instrument of Russian State Power,” 127.

39

created excess supply and a consumer’s gas market. Consequently, European customers

reacted by postponing gas purchases to take advantage of falling gas prices—against

Gazprom’s wishes for negotiating long-term contracts.131 It may appear that energy

exporters are currently at the behest of the consumer and Russia’s traditional use of

energy as a weapon has decreased in proportion to the price and demand for natural gas.

Yet, Europe’s recent ability to negotiate prices is not the result of changes to the pipeline

market, but rather is likely the influence of LNG imports and global shale gas production,

which will be examined in the next chapter.132

The EU is further concerned that Russia may not even be able to meet future

European energy needs due to profit skimming from Russian energy companies and lack

of reinvestment in new energy fields or infrastructure upgrades. According to Javier

Solana, while the EU’s High Representative for Foreign Affairs and Security Policy,

“Due to Russia’s outdated oil and gas pipelines, the equivalent of a quarter of Russia’s

total gas exports to Europe was being lost in transport.”133 Moreover, increased domestic

gas use in Russia reduces potential exports to Europe. Russia historically consumes two-

thirds of the gas it produces.134 Moscow’s commitment to provide fifteen percent of its

gas exports to China by 2020 further compounds these fears.135 Still, Moscow’s resolve

to be the “key center” of energy flow to Europe is resilient as evidenced in President

Putin’s decree to block the EC’s anti-trust investigation of Gazprom. Consequently, there

is concern that Russia will control Central Asian markets to meet increasing European

energy demand.136

131 Philip Shishkin, “Central Asia’s Crisis of Governance,” 18–19.

132 “Burst Valves: The European Union squeezes Gazprom. Russia Retaliates,” Economist, September 15, 2012, section: Europe, 52.

133 Cohen, “Russia: The flawed Energy Superpower,” 102.

134 Lioutu, 61.

135 Ibid.

136 Cohen, “Energy Security in the Caspian Basin,” 119; Michael Denison, “Game Over? Shifting Geopolitics in Central Asia,” The George Washington University, Central Asia Policy Brief No 5 (October 2012), accessed November 5, 2012, http://www.centralasiaprogram.org/images/Policy_Brief_5,_October_2012.pdf, 5.

40

While many fear Russia’s influence and hegemony in Central Asia, Central Asian

regimes do not view Moscow as a potential threat.137 Even though Russia may try to

block diversification of Central Asian energy to Europe—because Gazprom relies heavily

on these gas flows to meet European requirements—instead of developing new gas

sources to meet rising demand, the Central Asian states do not believe Moscow is strong

enough to bring former Soviet republics under its exclusive control.138 China’s entrance

into the Central Asian energy market—through financing and constructing the

Kazakhstan-China oil pipeline in 2004 and Turkmenistan-China gas pipeline in 2009—

has broken Russia’s monopolistic hold over Central Asia’s energy exports and decreased

Moscow’s geopolitical influence.139 While some have compared Russian, Chinese, and

western energy competition as a “new great game,” the Central Asian republics are not at

the whim of outside powers, but have learned to game the system—balancing the powers

against each other—for maximum benefit.140 The emerging reality in Central Asia is a

declining Russia in relation to China’s rising influence—with Europe watching from the

fringes—unless the EU changes its investment tactics. Western influence in Central Asia

can expand even if the Nabucco never becomes a reality. The European Union and

United States still have the opportunity to assist Kazakhstan, Turkmenistan, and

Uzbekistan in upstream investment and technological development for extraction and

exploration. Because investment in upstream technologies will not directly affected

western energy markets, a mental shift from extractive geopolitics and the great game

mentality that has overshadowed Central Asian relations is necessary.

137 Marlene Laruelle, “Russia ‘is a Delicate Matter?’ The View from Central Asia of Putin’s

Commitment to the Region,” German Marshall Fund of the United States, accessed September 12, 2012, http://www.gmfus.org/wp-content/files_mf/1337967202Laruelle_RussiaDelicateMatter_May12.pdf.Laurel, 2.

138 Ibid., Cohen, “Energy Security in the Caspian Basin,” 119.

139 Marcin Kaczmarski, “Domestic Sources of Russia’s China Policy,” Problems of Post-Communism 59, no. 2 (April 2012): 6; Jean A. Garrison and Ahad Abdurahmonov, “Explaining the Central Asian Energy Game: Complex Interdependence and How Small States Influence Their Big Neighbors,” Asian Perspective 35 (2011): 383–384, 398; International Energy Agency, World Energy Outlook 2011, 337.

140 Marlene Laruelle, “Russia ‘is a Delicate Matter?’” 2; Garrison, “Explaining the Central Asian Energy Game,” 398–99.

41

Russia’s power and influence in Central Asia has already started to wane.141 In

2008, Russia moved towards world energy prices for gas imports from Central Asia,

which signaled a weakening of Russia’s hold of inequality over this region. China also

overtook Russia as the largest Central Asian trading partner in 2010. Furthermore,

Kazakhstan and Turkmenistan both view China as a more reliable partner due to

vacillations in Russia’s energy policy.142 China even perceives Russia as a riskier and

less reliable energy resource than the autocratic regimes in Central Asia.143 Russia is no

longer seen as a provider of modernity or security because China is assuming this role,

and western technology and education is preferred to Russian expertise in some Central

Asian sectors.144 Thus, the Kremlin is facing a dramatic reassessment of Russia’s role as

the gate keeper between Asia and the west.

D. CONCLUSION

The contemporary Eurasian energy bridge may provide economical energy flows

to Europe and are less costly than other natural gas infrastructure investments; however,

this chapter has highlighted several drawbacks to Europe’s reliance on natural gas

pipelines. Most significantly, Russia’s dominating stake as an energy supplier allows

Moscow the potential leverage to influence individual countries and even thwart

European policies, like the EC’s initiative to unbundle energy delivery. Consequently, the

EU has sought methods to decrease reliance on Russian energy and build a defense

against future gas disruptions. This desire has spurred competition in the Southern Gas

corridor from Central Asia to Eastern Europe via the Nabucco and South Stream

pipelines.

This chapter has also shown that Nabucco and South Stream compete for

customers, transit states, investors, and natural gas sources. Furthermore, Nabucco faces

considerable hurdles; most importantly, lack of gas sources to render the pipeline feasible

141 Philip Shishkin, “Central Asia’s Crisis of Governance,” 30.

142 Nixey, “The Long Goodbye,” 12.

143 Cohen, “Energy Security in the Caspian Basin,” 121.

144 Nixey, “The Long Goodbye,” 15.

42

for economic investment. Consequently, construction of only the Nabucco West portion

(Turkey to Central Europe) has been postponed until an undisclosed date in 2013.

Conversely, South Stream is scheduled to begin construction of the most difficult and

expensive section—the Black Sea pipeline—in early 2013. South Stream is likely to

provide 30 bcm/year by 2017—before Nabucco begins producing 6 bcm/year—rendering

the EU’s project irrelevant. Yet, South Stream’s probable construction does not solidify

Moscow’s primacy over the Eurasian energy bridge.

Although Russia seeks to be the “key center” of the Southern Gas Corridor,

Gazprom’s project will do little to alter Eurasian energy dynamics. Moscow’s monopoly

in Central Asia has been lost to growing Chinese investment and influence, and South

Stream does not condemn Europe to Russian energy domination. Although Russia’s

voluminous natural gas resources, geostrategic position between Central Asia and

Europe, and ownership of critical pipeline infrastructure makes the EU’s goal to diversify

pipeline gas sources away from Gazprom nearly impossible, Moscow’s power over

Europe has been reduced due to decreased natural gas demand. Still, Europe’s bargaining

power vis-à-vis Moscow will only last while prices are low or natural gas supply is high.

The EU is still susceptible to Russian energy leverage because Europe cannot effectively

create new pipeline routes to diversify gas providers. Thus, the EU must shift its strategy

from seeking pipelines that bypass Russia or Iran to ensure its energy security.

Brussels has viable opportunities to diversify energy sources—outside new

pipeline construction. The EU could shift funding away from Nabucco to increasing

renewable energy research. Renewable energy is not only central to EU’s values and

future clean energy goals, but also essential to long-term, domestic energy projection.

Yet, unconventional gas exploration and transportation (shale gas and LNG) provides

more-immediate opportunities to diversify energy resources to meet short-term energy

security and clean energy goals. Several EU member states, including France, Germany,

Hungary and Poland possess significant shale gas deposits. Furthermore, the EU’s vast

shoreline provides ample space to build LNG terminals to link Europe to additional gas

exporters in the Middle East, Africa, and possibly the United States (if the United States

expands shale gas development). Therefore, the impact of unconventional natural gas

43

innovation on the geopolitical dynamics governing Eurasia’s energy bridge will be

explored in the subsequent chapter.

44


45

III. UNCONVENTIONAL GAS INNOVATIONS: PANACEA,

PROPAGANDA, OR PRACTICAL SOLUTION?

Fanfare and fear surround the possibility of Europe’s large-scale investment in

unconventional natural gas extraction and LNG import capacity. Proponents of shale gas

tout its potential to diminish the west’s dependence on unscrupulous energy providers

and LNG supporters predict an emerging global gas market that will reduce geography’s

relevance in energy relations. These positive perspectives have been bolstered by the

recent use of technology to overcome global natural gas scarcity and resource

competition. Less than a decade ago, global gas reserves were estimated to last only

seventy more years, but recent advances in hydraulic fracturing, enabling natural gas to

be extracted from shale rock, have expanded the “life span” of global gas to over 300

years.145 Despite the revolutionary potential of shale gas and LNG to unshackle the EU

from energy dependency on Russia, some Europeans fear the “golden age of gas” as

much as others anticipate it. The most significant uncertainties concerning

unconventional natural gas are environmental contamination (especially drinking water),

lack of monetary investment due to economic impracticality, and lack of political will

reflecting low public acceptance of these innovations. Only a handful of EU member

states are positioned to overcome these obstacles and extract shale gas in the future;

therefore, this “revolutionary” energy source will merely serve as a bulwark against

future gas disruptions. Conversely, LNG is the unconventional energy technology that

can transform European energy security dynamics. In order to illustrate the degree that

shale gas and LNG innovations will impact European-Eurasian energy relations, this

chapter will analyze the contemporary unconventional natural gas market, constraints on

European unconventional gas investment, and prospects for European shale gas and LNG

expansion. The chapter’s conclusion will examine how shale gas and LNG advances are

145 Paolo Natali, “The U.S. Natural Gas Revolution: Will Europe Be Ready in Time?” German

Marshall Fund of the United States, accessed August 1, 2012, http://www.gmfus.org/wp-content/files_mf/1338320486Natali_USNaturalGas_May12_web.pdf, 6.

46

reshaping the European-Eurasian gas market and highlight critical policy choices facing

the EU, Russia, and Caspian hydrocarbon states.

A. SHALE GAS: FRACTURING THE CONVENTIONAL GAS MARKET

1. Overview and Global Impact

U.S. shale gas extraction has created an almost fanatical response from

proponents and opponents alike; however, the dynamic impact of this new innovation

merits a cogent analysis of the U.S. “shale gas revolution” and its implications on gas

markets around the world. Although knowledge of shale gas is not new, the technology

required to extract this energy source in economically viable quantities has only been

available since 2000. Since then, U.S. shale gas extraction continued to rise, and in 2010

production reached over 10 billion cubic feet/day.146 Additionally, the IEA projected

U.S. shale gas extraction would double from 2010 through 2030—exceeding 50 percent

of U.S. domestic gas production and comprising 25 percent of the U.S. energy mix.147

Yet, this bountiful energy source is technically arduous to extract. To release shale gas,

trapped in subterranean rock, the source rock must be fractured by pumping fluid and

abrasive materials, often sand, to crack the rock. The high pressure fluid must also hold

these fissures open while the wellbore delves into the shale rock to extract the gas. This

extraction method, known as hydraulic fracturing or “fracking,” must discharge the

pumping fluid at 8,000 psi and can crack shale rock up to 3,000 feet in all directions from

the wellbore.148 The hydraulic fracturing process has been refined in U.S. shale fields or

“plays,” which enabled shale gas to become a viable and valuable energy source in the

United States and North America.

Domestic shale gas development has benefitted the U.S. energy market despite

the 2008 global economic downturn. Even though forty percent of U.S. conventional

natural gas rigs have shut down since 2008, U.S. natural gas production continued to

146 Medlock, Shale Gas and U.S. National Security, 9.

147 Ibid.; Howard Rogers, “Shale Gas-The Unfolding Story,” Oxford Review of Economic Policy 27, no 1 (2011), 136.

148 Rogers, “Shale Gas-The Unfolding Story,” 121, 130.

47

increase through 2010. Thus, shale gas extraction offset decreased conventional gas

production.149 Increased natural gas production lowered domestic gas prices and

consumers’ electric bills. According to the U.S. Energy Information Administration

(EIA) the 2011 average well-head price of shale gas was $3.95 per thousand cubic feet,

and prices in February 2012 dropped to $2.45 per thousand cubic feet.150 Domestic shale

gas production detached the United States from the global natural gas pricing system

pegged to oil prices, which resulted in lower U.S. rates than Europe’s long-term contracts

and interconnector spot prices.151 Additionally, growth in the shale gas market has

stimulated other U.S. sectors like the petrochemical industry.152 The U.S. is preparing to

develop its LNG export facilities as well. In 2012, eight LNG projects were proposed to

export 15.5 billion cubic feet per day. The U.S. Department of Energy has already

approved one of these export projects.153

U.S. shale gas production has not only benefited the U.S. market, but has also

significantly impacted regional markets across the globe—especially in Europe. As the

United States decreased LNG imports through 2010, gas shipments were redirected from

Middle Eastern exporters to European and Asian markets and affected prices in both

regions. Diverting LNG not only provided an alternative to Russian energy in Europe, but

created economic benefits as well.154 Instead of purchasing natural gas from Russia—

linked to oil-prices—European customers have been able to purchase a portion of their

energy mix at lower, competitive spot prices. If shale gas production proves economically

viable in Europe, then competitive natural gas pricing may not be an aberration in energy

relations, but the normal pricing mechanism.155 Despite positive market results, shale

gas’s most significant global impact is its ramification for energy security policies.

149 Ibid., 123.

150 Ibid., 3.

151 Rogers, “Shale Gas-The Unfolding Story,” 135.

152 Verrastro, “The Role of Unconventional Oil and Gas: A New Paradigm for Energy,” 67.

153 Paul Stevens, “The ‘Shale Gas Revolution’: Developments and Changes,” Chatham House, accessed October 25, 2012, http://www.chathamhouse.org/publications/papers/view/185311, 7.

154 Ibid.; Medlock, Shale Gas and U.S. National Security, 9.

155 Medlock, Shale Gas and U.S. National Security, 32; Stevens, “The ‘Shale Gas Revolution,’” 3.

48

World shale gas resources: 2011 EIA initial assessment156 Figure 3.

Increased shale gas production has the potential to become a cornerstone of global

energy security. New shale gas reserves are redefining the haves and have-nots

concerning hydrocarbon assets. According to a 2011 EIA survey of global shale gas

resources, “adding the identified shale gas resources to other gas resources increases total

world technically recoverable gas resources by over 40 percent.”157 In addition to almost

doubling the technically recoverable global gas sources, several European nations—that

have little to no conventional gas assets—are positioned to benefit from the shale gas

innovation. During a 2011 study, the EIA identified a grouping of seven countries where

shale gas investment would be most attractive. Of the seven nations in this grouping, four

are in Europe: France, Poland, Turkey, and Ukraine. These states are positively situated

for shale gas investment because they are heavily reliant on natural gas imports, have

some gas production infrastructure, and possess substantial shale gas resources to

improve self-sufficiency in relation to their gas consumption.158 Yet, shale gas

156 U.S. Energy Information Administration, “World Shale Gas Resources.”

157 U.S. Energy Information Administration, “World Shale Gas Resources: An Initial Assessment of 14 Regions outside the United States,” accessed October 9, 2012, http://www.eia.gov/analysis/studies/worldshalegas/.

158 Ibid.

49

investment could benefit more than this handful of European states; European shale gas

deposits have the potential to redefine Eurasian energy dynamics. Russia often subsidizes

prices in exchange for political influence or control of pipeline infrastructure. Because

Ukraine and Turkey are key transit states for Russian and Caspian energy, their increased

energy independence could foster discriminatory pricing in Europe and transparent

energy relations. Shale gas development could pull FSU members of the EU further away

from Russian influence. According to Kenneth Medlock, Energy and Resource

Economics Fellow at the Baker Institute, if European nations develop their shale gas

resources, Russia’s share of the FSU gas market could decrease from twenty-six percent

to below thirteen percent.159 Moreover, Poland and other FSU states’ isolation in the

wake of the Russo-German Nord Stream pipeline could be lessened through domestic

energy production. The potential to alter energy dynamics is echoed in markets around

the globe.

Increasing world shale gas production may also increase global energy security by

preventing the development of a global natural gas exporters’ union. Prior to recent shale

gas analyses, Russia and Iran were expected to possess over fifty percent of future global

gas reserves.160 Medlock predicts that shale gas production—outside of the United

States—could reduce Russia’s, Iran’s, and Venezuela’s hold on the gas market from

thirty-three percent to below twenty-six percent through 2040.161 If these three exporters

control only a quarter of global gas trade, they will not possess significant market share to

form a cartel without economic backlash from customers selecting other energy

providers.162 Consequently, the potential for increased energy security vis-à-vis

unscrupulous gas exporters, like Russia, and the tangible impact of U.S. shale gas

production on global natural gas prices has invigorated interest in European shale gas

exploration.


160 Ibid., 28.

161 Ibid., 13.

162 Moran, “The Globalization of America’s Defense Industries: Managing the Threat of Foreign Dependence,” 80.

50

2. Hurdles to Shale Gas Extraction

While there are significant advantages to developing European shale resources,

several noteworthy obstacles may preclude extracting this energy asset—namely

environmental, economic, and regulatory/public acceptance challenges. These

impediments will be examined in turn. The most publicized concern for shale gas

exploration is the environmental impact of fracking on the ecosystems and communities

surrounding drill sites. After fracking is complete, the “flow back” water—containing

dissolved rock particles and chemicals—must be disposed of at a separate location or

treated before returned to surface waters. Although the U.S. Environmental Protection

Agency (EPA) affirmed fracking did not affect drinking water, residents and local bodies

remained concerned with the ecological effects of shale gas. Several Colorado residents

affirmed that fracking had tainted their ground-water wells. Additionally, Pennsylvania

state regulators have penalized a single company for contaminating the drinking wells of

fourteen nearby homes with spills of chemical additives, and spills that contaminated a

local wetland.163 Congress responded to public concerns by urging the EPA to complete

another study. The EPA’s updated examination will be completed in 2014. Consequently,

the EPA has created guidance for fracking, but this method is still exempt from the Safe

Water Drinking Act.164 In addition to contaminated ground water, gas contamination is a

concern as well. Texas regulators have tested the air surrounding shale gas rigs and

processing plants for carcinogenic gases. As a result of these contamination fears, New

Jersey and Vermont have implemented bans on shale gas drilling and New York State has

established a moratorium on issuing new drilling permits and placed the Delaware

River—supplying 17 million people with drinking water—off-limits to drilling until the

updated EPA study is released.165

Another water related worry is the amount of water consumed during hydraulic

fracturing. For example the Barnett shale wells, in Texas, required and average of

163 Ibid., 133; Geoffrey Kemp, Corey Johnson, and Tim Boersma, “The Shale Gas Boom: Why

Poland Is Not Ready,” German Marshall Fund of the United States, accessed August 1, 2012. http://www.gmfus.org/wp-content/files_mf/1338835070KempEtAl_PolishShaleGas_Jun12.pdf, 3.

164 Rogers, “Shale Gas-The Unfolding Story,” 132–33.

165 Kemp, “Why Poland Is Not Ready,” 1; Rogers, “Shale Gas-The Unfolding Story,” 133.

51

250,000 gallons of water to drill a well and 3.8 million gallons to horizontally fracture

shale rock.166 Despite this excessive appearance, shale gas extraction requires less water

than many other energy sources. In order to extract shale gas, an average of 1.47 gallons

of water is used per one million British Thermal Units (MMBTU) of energy. This

requirement is far less than the extraction that coal (17 gal/MMTBU), oil (18.5

gal/MMBTU), or biofuel (2,500 gal/MMBTU) requires.167 Still, water consumption is a

likely concern in arid climates or remote regions where water must be trucked to drill

sites. A final environmental concern is the possible relationship between fracking and

seismic activity. In Ohio, the Department of Natural Resources affirmed that twelve

“seismic events” in the state were linked to human activity—namely the reinjection of

flow back water into the shale wells, but not from the fracturing process itself. There

have also been suspected links between shale gas extraction and earthquakes in Arkansas

and Oklahoma. Great Britain has implemented a system to overcome this obstacle—shale

gas exploration must halt in the event of a seismic event of 0.5 on the Richter scale and

will remain at a halt until tests are conducted and the government deems it is safe to

proceed.168 Even if the environmental concerns can be overcome, shale gas must still be

an economically viable resource for European energy companies.

Europe will not embark upon significant shale gas exploration, unless this process

is economically viable with existing technology. One economic hurdle concerning shale

gas is “decline rates” on shale wells that diminish faster than conventional wells. For

example, the Barnett well in the United States declined in production by thirty-nine

percent from the first through the second year and by fifty percent from the second to

third year.169 To continue producing economically viable shale gas, drilling companies

consistently “tune in” their equipment and techniques to extract more gas—at a lower

cost—in a given area. This adjustment process allows companies to improve production


167 Ibid.

168 Kemp, “Why Poland Is Not Ready,” 3.


52

rates, reduce costs, and improve profitably despite declining well outputs.170 The

greatest economic risk facing prospective shale gas investment is the substantial time and

monetary resources companies often expend in sub-economic areas before identifying the

most favorable wells. To offset this possibility, extensive European surveying is taking

place—especially in Poland.171 Although European companies can benefit from U.S.

experience and investment, no two shale gas fields are the same. Consequently, drilling

techniques must be fine-tuned to each shale play.172 European shale fields may not be

able to replicate the profits and decreased energy prices that North American shale plays

have produced. Europe’s shale resources are often smaller and deeper than U.S. plays,

which will likely require a more complex drilling technique and increased drilling

costs.173 Another key factor that separates U.S. and European markets is the regulator

and public acceptance environment.

U.S. shale gas exploration has been successful due to a combination of new

technology and advantageous state regulatory laws. Howard Rogers, Director of the

Natural Gas Research Program at the Oxford Institute for Energy Studies, asserts the

greatest challenges to European shale gas development are the European regulatory

regime and public acceptance.174 For example, the EU’s energy policies and its goal to

significantly diminish the amount of fossil fuels used by 2020 support investment in

renewable energies over natural gas. Similarly, France favors nuclear energy over

investment in natural gas. Thus, European policy may reduce demand for natural gas,

which could hamper shale investment.175 Yet, the most striking regulatory divergence

between U.S. and European energy markets is unbundled transport capacity of pipeline

infrastructure. If the U.S. market did not unbundle transport capacity rights from

pipelines owners, many small firms would not have been able to bid for pipeline capacity

and would not have begun extracting shale gas because their product would never has

170 Ibid., 128.

171 Ibid.

172 Stevens, “The ‘Shale Gas Revolution,’” 10.


174 Ibid., 137.


53

reached the market. Thus, European companies’ monopolistic control of energy

infrastructure precludes the involvement of smaller firms that could specialize in the

extraction of shale resources.176 Europe’s regulatory regime may not only inhibit

industry support, but public acceptance as well.

The most significant U.S. regulatory boost to shale gas is that American land

owners have rights to minerals beneath their property and can also negotiate with private

companies for access to these resources—in compliance with established laws.177 Even

though American citizens directly benefit from shale gas extraction through payment for

access to land or indirectly through significantly lower gas prices, American “nimbyism”

or “not in my backyard” mentality is still present due to environmental concerns

examined above.178 In Europe, policies are not only more environmentally conscious,

but hydrocarbon access is also largely controlled by the state. Thus, there is little

incentive for local residents to support shale exploration if they do not directly benefit

from this extraction.179 Moreover, citizens, environmental groups and Non-

governmental Organizations (NGOs) have placed significant pressure on European

governments to ban shale gas extraction. Consequently, Bulgaria and France have placed

moratoria on fracking; however, Britain continues to carefully explore this energy

source.180 Even though it appears that shale gas exploration may never reach fruition in

Europe, European shale gas production still shows noteworthy potential.

3. Prospects for European Extraction

European governments and private companies have shown interest in extracting

shale gas resources. EU companies, Statoil and Total, have both entered joint ventures

with U.S. firms to import fracking technology to Europe.181 UK-Danish company Royal

Dutch Shell, France’s Total SA, and U.S. energy firm Conoco-Philips have all acquired

176 Ibid., 14.





181 Institut Francais des Relations Internationales, Oil and Gas Delivery to Europe, 56.

54

rights to explore shale gas in Poland. Additionally, TNK-BP, a joint-company of BP and

Russian investors, has pledge $1.8 million to invest in Ukraine’s shale projects. Italy’s

Eni SpA and U.S. Chevron Corp have already invested in western Ukrainian shale gas.

The Chevron corps has also acquired more than 6,250 square kilometers of potential

shale gas fields in Central Europe since 2009.182 Polish leaders have touted shale gas’s

potential for increased profits, lower energy costs, and energy independence from

Russia.183 Additionally, there is active research into shale potential in Austria, Croatia

Denmark, France, Germany, the Netherlands, Romania, Sweden, Ukraine, and the United

Kingdom.184 The EIA’s 2011 assessment of world shale gas deposits affirmed that

Europe contains 639 trillion cubic feet (tcf) of technically recoverable shale gas, which is

a significant resource when compared to its conventional natural gas reserves of 186

tcf—including Norway. Furthermore, forty percent of these shale gas reserves are located

in Europe’s Former Soviet or Warsaw Pact states.185 Thus, shale gas is a possible avenue

to bolster European energy security by decreasing import dependency.186 Even though

EU member states are particularly interested in reducing dependence on Russian energy,

shale gas proponents must overcome environmental, public acceptance, and economic

hurdles.

Because European policy makers can use the U.S. shale gas experience as a case

study, regulators and politicians are unlikely to support fracking without comprehensive

proof that environmental impacts can be minimized. Once the U.S. EPA’s analysis of

fracking’s effects on drinking water is complete in 2014, European investment is likely to

move forward based on the results.187 Several recent U.S. studies have shown that

environmental contamination related to shale extraction has been caused by poor

182 “Shale-Gas Boom Hits Eastern Europe,” Wall Street Journal, The Journal Report: Energy,

September 17, 2012, R9.




186 Rogers, “Shale Gas-The Unfolding Story,” 136; Institut Francais des Relations Internationales, Oil and Gas Delivery to Europe, 57.


55

adherence to existing regulations—not the employment of fracturing technology.188

Additionally, the UK’s Royal Society and Royal Academy of Engineering published

research findings in 2012 that affirmed, “The health, safety, and environmental risks

associated with hydraulic fracturing…as a means to extract shale gas can be managed

effectively in the UK as long as operational best practices are implemented and enforced

through regulation.”189 Thus, increased regulations or government surveillance is the

likely outcome of pending environmental studies. For example, the “Fracking Act” is

currently being drafted in the U.S. Congress to ensure that companies openly disclose all

chemicals used during shale gas drilling. These measures should bolster public

acceptance, but will also result in cost increases.190 Because EU member states are less

likely to provide exemptions from environmental legislation, European shale gas

investors and industry leaders will likely be at the forefront of stimulating public

acceptance.

In the United States, the shale gas industry has responded to environmental

concerns and declining public support by committing to responsible stewardship of

environmental resources. Although the “Fracking Act” is pending Congressional

approval, companies have already begun campaigns of transparency and community

engagement. According to Frank Verrastro, Director of the Energy and National Security

Program at the Center for Strategic and International Studies, “Smarter, safer, cleaner is

now an operational necessity.”191 Yet, Paul Stevens, Senior Research Fellow for Energy

at Chatham House, believes European shale proponents are unlikely to overcome the

public’s environmental fears: “If the public has become convinced that shale gas

operations are bad, then no amount of scientific study or knowledge will counter this.”192

Despite substantial concerns that European policy makers will not sacrifice political

capital to support the shale gas industry, several key political factors exist that may


189 Ibid., 8.

190 Rogers, “Shale Gas-The Unfolding Story,” 135; Stevens, “The ‘Shale Gas Revolution,’” 5.

191 Verrastro, “The Role of Unconventional Oil and Gas,” 68.


56

encourage European leaders to persuade public opinion.193 First, the EU does not have a

unified shale gas policy; therefore, popular support for fracking will likely vary

depending on the size of a nation’s shale gas deposits and their reliance on Russian

gas.194 Poland is a prime candidate for shale gas extraction due to its reliance on Russian

energy, stated concern for Russia’s abuse of its market position, and large shale gas

reserve. Second, European nations that possess substantial shale gas deposits (France,

Germany, Norway, the Netherlands, Poland, and the UK) all have a history of domestic

oil and gas production; therefore, these states likely have the regulatory apparatus to

oversee shale gas exploration.195 These nations also currently produce natural gas

domestically, which should provide shale proponents and policy makers a starting point

to positively influence local populations through focusing on increased energy

independence and security.196 Finally, the high cost of Europe’s low-carbon energy

sources, such as renewables or nuclear energy—which has low popular support after the

Fukushima Daiichi reactor disaster—offers fertile ground for politicians to support

natural gas as a short-term domestic alternative to decrease electricity prices.197

Although, several European nations could garner public support for domestic shale gas

production, European shale gas extraction will not achieve marketable quantities unless

fracking proves economically viable.

Despite Europe’s sufficient regulatory institutions to mitigate environmental

impact and likely public support from several EU member states, Europe’s natural gas

market may not support immediate shale gas extraction. Due to low European gas prices

and a five year production timeline required to develop viable extraction techniques,

several analysts affirm that Europe will not extract shale gas in substantial quantities (30

193 Ibid., 8.


195 Ibid.



57

bcm/year) for several years—possibly after 2020.198 Ian MacDonald, Chevron’s Vice

President in charge of exploration and production strategy for Europe, Eurasia, and the

Middle East, estimates it will take another three to five years just to determine if Eastern

European shale gas deposits are viable.199 Furthermore, Russia’s long-term contracts

(often extending past 25 years) with most of Eastern Europe render it uneconomical for

some states to seek alternative energy sources.200 In Poland, one of the most likely shale

gas producers, demand and infrastructure may prove the greatest economic hurdle.

Because Poland relies heavily on coal consumption to heat homes, only fifty percent of

Polish households are connected to natural gas infrastructure. Consequently, there is not

enough current demand to make shale gas investment economically viable. Furthermore,

Poland’s shale gas reserves are located in the north, east, and southeast portions of the

country, while its pipeline infrastructure is in the southwest.201 Therefore, substantial

infrastructure investment is required to not only deliver shale gas to domestic consumers,

but export markets as well. Without viable export routes, private investment in Poland’s

shale fields is unlikely to materialize in the short term. Still, several analysts affirm that

shale gas will play a limited role in Europe’s energy security dynamics after 2020.202

Shale gas will likely provide ten percent of Europe’s domestic energy mix, which enables

this energy source to serve as “swing product,” but will not create Europe self-

sufficiency.203 Consequently, European nations could increase or decrease shale gas

production based on market signals—when pricing is profitable or to offset gas

disruptions. Because large-scale shale production is several years away, many EU

198 Institut Francais des Relations Internationales, Oil and Gas Delivery to Europe, 57; Kemp, “Why

Poland Is Not Ready,” 4; Rogers, “Shale Gas-The Unfolding Story,” 140; Stevens, “The ‘Shale Gas Revolution,’” 8; Jonas Teusch, “Shale Gas and the EU Internal Gas Market: Beyond the Hype and Hysteria,” The Center For European Policy Studies, accessed October 25, 2012, http://www.ceps.eu/book/shale-gas-and-eu-internal-gas-market-beyond-hype-and-hysteria, 3.

199 “Shale-Gas Boom Hits Eastern Europe,” Wall Street Journal. The Journal Report: Energy. September 17, 2012.

200 Ibid.


202 Rogers, “Shale Gas-The Unfolding Story,” 139; Teusch, “Shale Gas and the EU Internal Gas Market,” 3; Stevens, “The ‘Shale Gas Revolution,’” 8.

203 Rogers, “Shale Gas-The Unfolding Story,” 138–39.

58

member states are still concerned about reliance on natural gas exporters. This import

dependence may be reduced by increasing European Liquefied Natural Gas investment.

B. LIQUEFIED NATURAL GAS: SECURITY IN LIQUIDITY

1. Overview and Global Impact

The EU’s reliance on natural gas imports is anticipated to reach 84 percent by

2030 as oil and coal continue to be replaced by natural gas. Moreover, natural gas is

viewed as an efficient energy source to buffer against the unreliability of renewable

energy and is more palatable than nuclear power.204 This increased use of natural gas

does not ally European fears of energy insecurity; however, LNG offers an alternative for

European energy consumers. LNG is not a new form of energy, like shale gas, but a new

method for delivering natural gas. In order to transport LNG, natural gas must be cooled

in special facilities to minus 256 degrees Fahrenheit—allowing the gas to condense and

liquefy. Once natural gas is transformed into a liquid, it can be transported in specialized

tankers to regasification terminals anywhere in the world. LNG can also be “regasified”

onboard these vessels and fed directly into natural gas pipelines.205 Although LNG was

initially utilized to transport natural gas long distances, when pipelines proved

uneconomical, it has become feasible and economically viable across short distances. For

example, projects in Cyprus and Lebanon are under construction to import LNG from

Egypt and Algeria.206 Yet, LNG’s significance is not the mechanical achievement of this

new transport technology, but its revolutionary impact on gas markets around the globe.

Liquefied natural gas has begun transforming the natural gas trade from a regional

market into a global market because LNG exporters can ship natural gas to any country

that has regasification capabilities. Unlike pipeline gas, geographic proximity does not

dictate energy relations; LNG can be imported without relying on one’s neighbor for


205 Cindy Hurst, “Liquefied Natural Gas: The Next Prize?” In Energy Security Challenges for the 21st Century: A Reference Handbook, ed., Gal Luft and Anne Korin (Washington, D.C.: Library of Congress Cataloging-in-Publication Data, 2009), 270.

206 Patrick Cayrade, “Investments in Gas Pipelines and LNG Infrastructure: What impact on the security of supply?” The Center for European Policy Studies, accessed October 25, 2012, http://www.ceps.eu/book/investments-gas-pipelines-and-lng-infrastructure-what-impact-security-supply, 4.

59

transit or export. LNG accounted for twenty-eight percent of the global gas trade in 2009

and the Institut Francais des Relations Internationales (IFRI), an independent French

policy center, estimates LNG production will double by 2020.207 Shale gas has increased

the importance of LNG because a majority of these new gas producers, including the

United States, cannot export to Europe via pipelines. LNG technologies enable Europe to

take advance of a global shale gas boom, even if the EU does not seek full shale

exploration itself.208 LNG shipments also provide opportunities for natural gas price

negotiation in contrast to the rigid pipeline system of linking gas to oil prices.209 As a

result of the U.S. shale gas boom, Middle Eastern and African LNG exports previously

identified for the United States were shifted to Europe, which resulted in an alternative to

Russia’s natural gas and pressured Russia to renegotiate its long-term contracts to accept

lower prices and even index a portion of its gas sales on spot prices instead of oil

prices.210 Moreover, Gazprom has struggled to compete in Europe with LNG deliveries

that are sold on spot markets because Russia’s energy monolith is increasingly viewed as

an unreliable and costlier energy provider.211 As spot pricing increases in the gas market

and gas delinks from oil prices, gas and oil sources can actually compete in the energy

market, which is beneficial for European energy consumers.212 Moreover, as LNG

imports increase, competition among exporters will likely render oil indexing difficult as

customers will have the opportunity to choose amongst energy providers.213 LNG

provides physical and market liquidity that can also mitigate price spikes due to regional

gas disruptions.214 For example, Greece, a nation dependent on Russia for seventy-six

percent of its gas imports, was able to completely offset gas disruptions during Russia’s

2009 price dispute with Ukraine by increasing imports via a single LNG regasification


208 Teusch, “Shale Gas and the EU Internal Gas Market,” 5.

209 Natali, “The U.S. Natural Gas Revolution,” 7.

210 Medlock, Shale Gas and U.S. National Security, 11 & 32.

211 “Burst Valves: The European Union squeezes Gazprom. Russia retaliates,” Economist.

212 Liuhto, The EU-Russia gas connection: Pipes, Politics and Problems, 50.


214 Ibid., 29.

60

terminal.215 Greece also used these LNG imports to supply Bulgaria during the 2009

dispute.216 In addition to reshaping the natural gas market, LNG has altered energy

security dynamics as well.

Liquefied Natural Gas has enabled Europe to blunt Moscow’s energy blackmail

attacks by diminishing Russia’s market share of European energy imports. In May 2012,

Europe’s LNG imports primarily originated in Qatar (41 percent), Algeria (22 percent),

and Nigeria (18 percent).217 IFRI estimates that the EU-27’s LNG consumption will

increase from sixteen percent to thirty-two percent in 2030.218 Consequently, continued

LNG investment could reduce Russia’s stake in non-FSU Europe from twenty-seven

percent in 2009 to thirteen percent by 2040.219 In addition to diversifying energy

importers, LNG eliminates transit state instability and minimizes regional instability that

may shutdown pipeline operations like the 2008 Russo-Georgian War. Furthermore, LNG

offers a surge capacity to offset natural disasters or terrorist attacks against conventional

pipelines instead of leaving citizens subject to the forces of nature, will of terrorists, or

whims of fickle energy providers.220 Despite the apparent benefits of European LNG

investment, these positive impacts may dissipate if LNG development stymies due to

political, economic, or security constraints on future LNG investment.

2. Obstacles to Investment

Energy investment is inexorably linked to domestic and foreign politics; LNG is

no different. European nations may be wary of increasing investment in LNG

regasification terminals because increased reliance on LNG exporters may limit the EU’s

ability to denounce human rights violations and undemocratic practices in these nations.

Most LNG exporters are not democracies and do not share Europe’s free market values.





219 Medlock, Shale Gas and U.S. National Security, 13; Hurst, “Liquefied Natural Gas: The Next Prize?” 272.

220 Hurst, “Liquefied Natural Gas: The Next Prize?” 275.

61

Thus, LNG exporters may deny Europe gas imports if EU member states’ principles or

actions incense an authoritarian export nation.221 While the 1973 oil embargo may seem

a tempting example of this fear, a gas-OPEC has yet to form that could employ such an

embargo. Furthermore, Europe’s inaction during the 2008 Russo-Georgian war illustrates

that political constraint through pipeline energy relations is no less threatening than

potential constraints from LNG imports.222 At the domestic level, European citizens may

not support increased LNG facility construction near their homes. Even U.S. citizens, a

public that often supports energy independence, displayed nimbyism during site surveys

for future LNG terminals.223 This concern was overcome in the United States through

the use of offshore regasification terminals. Public acceptance fears appear to be the least

significant drawback to LNG investment; yet, some EU politicians question the utility of

increasing LNG import terminals.224

European capitals, including Berlin, doubt moving forward on LNG investment

because LNG regasification hubs currently exceed liquefaction capabilities in export

nations. Moreover, increased natural gas consumption in Asia, especially China, point to

issues in security of supply.225 According to Kari Liuhto, Director of the Pan-European

Institute, increasing Europe’s LNG regasification facilities assumes increased LNG

exports from Iran, Iraq, and Qatar—all states that favor the Groningen price system

(linked to oil prices) via pipeline deliveries over the price instability of LNG spot

markets.226 Furthermore, Iran and Iraq could provide natural gas to China without

developing LNG capabilities by linking into the pipeline from Turkmenistan to China. In

addition to security of supply, physical security is another concern. Although LNG is not

221 Ibid.

222 Anderson, “Europe’s Dependence on Russian Natural Gas,” 41–2; Medlock, Shale Gas and U.S. National Security, 54.


224 Francisco de la Flor, “LNG: A major contribution to a sustainable, competitive and secure European gas market,” Presentation to the European Energy Forum, Brussels: May 30, 2012, accessed October 25, 2012, http://www.europeanenergyforum.eu/sites/default/files/events/files/public/gle_presentation_at_eef_dinner_debate_30_may_2012.pdf, 8.

225 Teusch, “Shale Gas and the EU Internal Gas Market,” 5.


62

flammable or volatile, it vaporizes quickly into methane, which is highly explosive. Thus,

terrorists may target regasification sites to create methane vapor clouds that ignite easily.

Furthermore, LNG tankers may become terrorist targets because these vessels are easily

distinguishable from other merchant ships, an attack on an LNG vessel would seriously

impact import economies and citizens, and gas prices would increase to the benefit of gas

export nations—some of which have sponsored terrorist organizations in the past.227

Although the threat of terrorism is the most high profile risk, it can be significantly

mitigated through maritime security and port security measures that are already in place

in most the world’s ports and heavily traveled maritime trade corridors. Additionally,

many U.S. terminals have been built offshore to reduce the population impact of a

terrorist attack or industrial accident.228 Although combating energy security risks are

important to the European citizens, increased LNG production will not come to fruition

unless this delivery method is economically viable.

The most significant hindrance to increased LNG development is securing

adequate funding. LNG terminals and transport systems are capital intensive in

comparison to pipeline networks.229 For example, a proposed LNG supply chain from

Egypt to Cartagena, Spain (2,735 km) will require $1.6 million in investment for two

tankers, a liquefaction terminal, and regasification terminal. This estimate does not

include upstream infrastructure investment to transport natural gas to the liquefaction

terminal. This project is expected to provide 4.8 bcm/year of natural gas at a cost of

$2.56/MMBTU. A similar pipeline project, the MEDGAZ from Algeria to Spain, began

providing 8 bcm/year in March 2011 via an undersea conduit at a total cost of $1.2

million, including upstream investment, or $1.46/MMBTU.230 In addition to production

costs, the manpower required to crew an LNG vessel may not be able to keep up with

transport demand. Each LNG ship requires seventy specially-trained crewmembers at full

227 Hurst, “Liquefied Natural Gas: The Next Prize?” 276–77.

228 Ibid., 277–78.

229 Cayrade, “Investments in Gas Pipelines and LNG Infrastructure,” 11.

230 Ibid., 8.

63

strength.231 Another hindrance to investment is the likely decoupling of gas from oil

prices as global LNG deliveries increase. LNG spot markets do not support price stability

or security of demand that energy exporters desire. Unstable gas prices may not support

financing large projects to tap new natural gas fields.232 Still, LNG technologies and

transport costs are projected to decrease through 2020 to include a twenty percent

reduction in the cost of liquefaction plant construction and a technological improvement

to increase the size and double the transport capabilities of tankers while reducing their

production costs by ten percent. Additionally, construction times are likely to decrease

from five years to four years for a mature LNG supply chain.233 These projected

decreases in LNG production costs and anticipated increases in global LNG demand bode

well for LNG investment.

3. Prospects for European LNG Expansion

European LNG imports are a significant portion of the world LNG market and

poised to grow. Natural gas consumption in Europe will almost certainly increase as most

Eastern European EU member states, struggling to meet the 2020 renewable energy goals

(twenty percent of domestic energy provided by renewables) will likely focus on

importing inexpensive energy. To mesh their low-cost energy desires with the EU’s

environmental values, most Eastern European states will substitute coal consumption

with natural gas.234 In 2010, LNG comprised one-sixth of Europe’s gas imports and

Europe’s imports totaled one-third of the global LNG market. Europe’s twenty-one

existing LNG terminals provide 191 bcm/year capacity. Additionally, thirty-four facilities

are planned or under construction. If these import sites are completed, Europe could

increase LNG capacity to 417 bcm/year by 2020. Consequently, 75 percent of Europe’s

natural gas imports could be supported via LNG.235 Conservative analysts predict


232 Cayrade, “Investments in Gas Pipelines and LNG Infrastructure,” 11.

233 Ibid., 8.


235 Natali, “The U.S. Natural Gas Revolution,” 11; Teusch, “Shale Gas and the EU Internal Gas Market,” 6.

64

Europe will double its capacity—due to economic and policy constraints—to 380

bcm/year, which still provides a significant majority of Europe’s future gas imports.236

LNG’s growth potential may enable Europe to move beyond the status quo in energy

relations and security policies.

Current and planned European LNG infrastructure237 Figure 4.

LNG is currently viewed as a means to ease European import dependency on

Russia in exchange for higher energy costs. For example, Poland and the Baltic States,

with EUR80 million support from the EU’s European Energy Program for Recovery,

have begun constructing the Świnoujście LNG terminal in Poland even though this

enterprise may not be economically profitable. This project will likely reach completion

because LNG is a significant boon to Eastern European energy security vis-à-vis

Russia.238 Yet, pipeline gas is less expensive; even though it comes with the possibility

236 Natali, “The U.S. Natural Gas Revolution,” 8 & 11; Medlock, Shale Gas and U.S. National

Security, 21.

237 de la Flor, “LNG: A major contribution to a sustainable, competitive and secure European gas market,” 8.

238 Katarzyna Piasecka, “Construction on Świnoujście LNG terminal to start in March,” Warsaw Business Journal, January 25, 2011, accessed October 25, 2012, http://www.wbj.pl/article-52927-construction-on-swinoujscie-lng-terminal-to-start-in-march.html.

65

of Russian energy blackmail or gas shutoffs.239 Thus, some analysts foresee LNG merely

serving as a backup energy source or insurance policy, but not a dynamic future

resource.240 Even as a buffer energy source, LNG has the potential to innovate the

Eurasian gas market.

The most significant impact of LNG imports to Europe is that old patterns of

energy dependence are weakened, if not shattered. As European states develop LNG

terminals, they are no longer forced to rely on unreliable pipeline energy exporters or

unstable transit states.241 In 2005, the European Council issued a communique in 2005

that supported increasing LNG shipments to diversify energy supplies, support growing

EU gas demand, but most importantly, to use LNG to facilitate gas-gas competition via

pipelines from Russia and regional natural gas interconnectors.242 Therefore, LNG

development in Europe will likely not only mitigate dependence on Russia, but facilitate

natural gas price competition as well.243 Additionally, Russian gas companies may not

be able to support increased European gas consumption due to ineffective management

and lack of investment in new gas fields. Consequently, natural gas imports will be

required from more remote locations—enabling LNG to be truly competitive with future

long-distance pipeline construction.244 Nevertheless, European regasification capabilities

are not evenly distributed within the continent, and a significant east/west divide is

evident. LNG imports sites are predominately in Western Europe. Spain is the largest

LNG consumer in Europe and Italy has had fourteen LNG terminals under construction

since 2009. Conversely, Germany has no LNG terminals and only one planned for

construction. Of the twenty existing terminals and six more under construction, Poland’s

facility is the only terminal located in an EU member state that is almost completely

239 Cayrade, “Investments in Gas Pipelines and LNG Infrastructure,” 12; Hurst, “Liquefied Natural

Gas: The Next Prize?” 279.

240 Cayrade, “Investments in Gas Pipelines and LNG Infrastructure,” 12; Institut Francais des Relations Internationales, Oil and Gas Delivery to Europe, 57.



243 Ibid., 96.

244 Ibid., 61; Cayrade, “Investments in Gas Pipelines and LNG Infrastructure,” 6–7.

66

reliant on Russian energy.245 This disparity highlights the vulnerability of Eastern

Europe to Russia in contrast to Western Europe’s apparent energy security. Yet, the

current lack of LNG terminals in Eastern Europe does not consign these states to Russian

domination. LNG imports to Western Europe can still bolster Eastern European energy

security—if the EU develops policies and energy infrastructure to support an internal

European market.

C. CONCLUSION

The fanfare surrounding global shale gas resources may not result in a shale gas

boom in Europe; however, this energy source will still play a role in Europe’s future

energy mix. Despite the substantial shale resources in Europe and its potential to

significantly reduce Europe’s energy dependence, the environmental, technological and

economic, and regulatory/public acceptance challenges facing the shale industry will

likely prevent wide spread extraction in Europe. Yet, the lack of EU policy concerning

hydraulic fracturing technologies allows EU member states maneuver room to explore

their own domestic energy policies and environmental regulations. United Kingdom

policy supporting shale extraction and its efforts to minimize environmental impacts bode

well for future British shale development. Additionally, the Polish government’s strong

support for energy independence and private investment in the Polish shale industry by

several American and European firms illustrate the likelihood of significant shale

extraction in Poland. Moreover, heavy investment into Ukraine’s shale gas capabilities is

ongoing. Despite British, Polish, and Ukrainian extraction potential, shale gas will likely

serve as a swing energy source for most of Europe—providing buffers against import

disruptions. Shale gas production in a few European nations is still several years away,

which leaves the specter of import dependence looming in most European capitals. Even

if the EU does not seek full-scale shale gas exploration, LNG technologies enable Europe

to take advantage of the U.S. shale gas boom via increased gas imports from the Middle

East and Africa that were previously designated for the United States.

245 Institut Francais des Relations Internationales, Oil and Gas Delivery to Europe, 57; Hurst,

“Liquefied Natural Gas: The Next Prize?” 272; Natali, “The U.S. Natural Gas Revolution,” 11.

67

LNG is the likely unconventional energy technology that will revolutionize

European-Eurasian energy security dynamics. Liquefied Natural Gas has already served

as insurance against gas disruptions, including during the 2009 Russo-Ukrainian energy

disputes. Europe’s twenty-one LNG terminals will be augmented shortly by the

expansion of three existing facilities and construction of six new terminals within the

next four years. Furthermore, eleven terminals are scheduled for expansion and twenty-

eight new LNG import sites are planned for future development. If these terminals are

completed, European LNG import capacity will reach 417 bcm—seventy-five percent of

the EU’s natural gas imports. Although the most significant hindrance to increased LNG

development is securing adequate funding, the EU’s EUR80 million investment for

Poland’s Świnoujście LNG facility is a strong display of European political will despite

concerns about the project’s economic profitability. Furthermore, LNG technologies,

construction timelines, and transport costs are expected to continue decreasing, while

transport capacity and productivity are predicted to increase through 2020. LNG’s

ramifications extend beyond technological achievements and have the potential to

significantly alter Europe’s energy market.

Increased LNG imports should create competition among exporters, which

habitually lowers prices to slightly above production costs. Thus, additional natural gas

supplies will likely compel pipeline exporters to sell a portion of their natural gas at spot

prices instead of the Groningen oil index. Furthermore, increased EU natural gas will

likely require gas from more remote locations, which will enable LNG to become even

more competitive with future long-distance pipelines. Consequently, energy providers

that feed long-distance pipelines may have to accept spot pricing as the new normal to

complete with LNG in the globalizing gas marketplace. Still, the most significant impact

of LNG imports to Europe is that old patterns of energy dependence are weakened. As

European states build LNG terminals, Russia’s dominance over energy exports will

continue to diminish. Liquefied Natural Gas has enabled Europe to blunt Moscow’s

energy blackmail attacks by diminishing Russia’s market share of European energy

imports and its ability to disrupt domestic markets as seen in Greece’s ability to provide

68

natural gas to itself and in Bulgaria during the 2009 Russo-Ukrainian energy disputes.

Yet, the location of Europe’s LNG terminals raises some concerns.

Although several LNG terminals are planned in the Baltic Sea and Black Sea

littorals of Eastern European nations, Poland is the only state dependent on Russian gas

that will have a terminal in the near term. The disparity in the LNG import capacity may

appear to condemn Eastern Europe to Russia’s fickle energy policies, but LNG terminals

in Western Europe can still bolster Eastern European energy security if the EU develops

policies and energy infrastructure to support an internal European market. The

importance of EU energy policy in reaction to European unconventional gas investments,

including LNG terminals, will be examined in the next chapter. However, EU member

states are not the only nations at a crossroad. Moscow’s objection to transparency and

adhering to EU regulations remains stalwart, but unconventional natural gas has provided

Europe with an energy alternative. This shift in Eurasian energy dynamics warrants

exploring Russia’s political will and ability to adapt and the policy implications for

energy exporting nations in the Caspian region as well.

69

IV. POLICY IMPLICATIONS OF THE ALTERED ENERGY

BRIDGE

Liquefied Natural Gas has already altered Eurasian energy dynamics. Russia no

longer holds a monopolistic position in EU gas imports and its power to form a gas cartel

has been severely limited; EU member states continue to diversify gas imports with 21

operational LNG terminals and 34 terminals planned or under construction; and

diminished European demand for Caspian gas has facilitated a shift of Central Asian

energy to China. Yet, the emergence of unconventional gas technologies does not render

energy diplomacy obsolete. According to Daniel Yergin, government policy, not

extractive capability, is the most critical factor for ensuring energy security.246

Therefore, this chapter will examine the internal and external policy implications of the

changes to Eurasia’s Energy Bridge. This chapter will initially assess the impacts of LNG

and shale gas on Russia’s domestic energy industry and how an emerging international

gas market will alter Russia’s relations with Europe, the Caspian Basin, and China. I will

then explore the future of the Caspian region, which is traditionally viewed as key to

energy security. European LNG imports not only impact the Caspian nations’ relations

with the West, but will likely influence internal politics as well. Finally, this chapter will

examine how natural gas innovations provide a significant incentive for EU internal

market integration, which will lead to an investigation of future energy relations between

the EU, Russia, and the Caspian hydrocarbon states.

A. RUSSIA: WILL MOSCOW GRIN AND BEAR IT?

1. Internal Policies

President Putin’s July 2012 speech to Russia’s ambassadors touted economic

power as the source of Russia’s strength in foreign relations; it is the same in domestic

politics.247 Russia’s political elite understand that hydrocarbon funds are key to

economic stability and political popularity. Oil and gas exports currently support one-

246 “The Journal Report: Energy,” Wall Street Journal, September 17, 2012, R3.

247 Putin, “Russia in a Changing World: Stable Priorities and New Opportunities.”

70

third of Russia’s annual budget.248 Therefore, economic prosperity and political stability

depend on exporting hydrocarbons to Europe at high prices. This economic dynamic may

provide a partial explanation for the Kremlin’s strategy to consolidate hydrocarbon

exporters into monopolistic corporations, like Gazprom, which controls ninety percent of

Russia’s gas exports. Yet, the EU’s move to diversify imports through LNG erodes

Russia’s ability to demand high prices and long-term contracts. The possible extraction of

shale gas by a handful of member states, especially Poland, exacerbates this problem.

Consequently, future European gas prices may drop to half of the current oil-linked

prices. Thus, a central girder of Russia’s domestic stability is weakening and a substantial

income stream for Russia’s ruling elite is in jeopardy.249

Russia’s industry leaders, politicians, and criminal entrepreneurs have utilized the

energy sector to launder illicit profits while enriching high-level elites. The corrupt

management of Gazprom has rendered it economically stagnant. Gazprom pays twice the

global average construction cost to build its pipeline projects, and fifty percent of the

funds Gazprom invests in development simply disappear.250 In 2008, Gazprom’s

corruption and waste totaled $40 billion, while its annual profits were only $44.7 billion.

Moreover, Gazprom’s persistent utilization of intermediary companies is likely driven by

rent-seeking activities. Russia’s political elites and criminal entrepreneurs have

developed a network of dummy corporations to build trans-national alliance with the aim

of laundering illicit profits, while enriching high-level elites. By 2008, Gazprom had

established fifty intermediary companies with the consent of political elites.

Intermediaries serve little practical purpose in the energy trade; they do not own or

operate pipeline infrastructure or expedite products and payments. These practices have

248 Andrei Shleifer and Daniel Treisman, “Why Moscow Says No: A Question of Russian Interests,

Not Psychology,” Foreign Affairs, 90, no. 1 (2011), 3; George H. Quester, “Energy Dependence and Political Power: Some Paradoxes,” Demokratizatsiya: The Journal of Post-Soviet Democratization 15, no. 4 (October 2007), 450.

249 Shleifer, “Why Moscow Says No,” 5; Anders Aslund, “Big Setbacks Give Gazprom Impetus for Change,” Moscow Times, September 27, 2012, accessed November 21, 2012, http://www.themoscowtimes.com/opinion/article/big-setbacks-give-gazprom-impetus-for-change/468840.html.

250 Anders Aslund, “Why Gazprom Resembles a Crime Syndicate,” Moscow Times, February 28, 2012, accessed November 21, 2012, http://www.themoscowtimes.com/opinion/article/why-gazprom-resembles-a-crime-syndicate/453762.html.

71

led some economic analysts to liken Gazprom to a crime syndicate funneling profits to its

bosses.251 Simply put, Russia’s energy sector is poorly managed, corrupt, and

weakening.

Gazprom’s decision to cancel development of the Shtokman field in the Barents

Sea is one indication of Russia’s weak energy sector.252 While the uncertainty in the

European market plays some part in this decision, the lack of energy profitability in the

domestic market, due to price subsidies, may be the greatest obstacle to new

investment.253 In addition to the need for new field development, much of Russia’s gas

infrastructure is a remnant of the Soviet pipeline system—in need of replacement.254 In

the light of Russia’s waning energy sector, the opportunity for bold changes in the

domestic market is ripe. Rent seeking will no longer support increased Russian living

standards or competiveness in the globalizing gas market. Gazprom’s inefficiency and

corruption are unlikely to be remedied, but the company could be separated into several

medium-sized, private companies. Small corporations have been successful in Russia’s

oil industry and these firms may be able to exploit the large gas fields that Gazprom has

been unable to develop.255 Instead of subsidizing energy prices to bolster living

standards, the Kremlin could deregulate energy and gas sectors to enable Russian

business to use energy more efficiently and compete domestically and internationally.

Additionally, commitment to the Kremlin’s timeline for removing energy subsidy better

position gas firms to make profits in the domestic market, which would increase the

251 Shleifer, “Why Moscow Says No,” 5; Anders Aslund, “Why Gazprom Resembles a Crime

Syndicate;” “Transparency in Russia and Eurasia and Energy Interdependence,” Chatham House, November 5, 2008, accessed June 10, 2012, http://www.chathamhouse.org/publications/papers/view/108856, 8–9, 11; Roman Kupchinsky, “Russian Energy Sector Opaqueness: Testimony before the Senate Foreign Relations Committee,” June 12, 2008, U.S. Senate Committee on Foreign Relations, accessed November 8, 2012. http://www.foreign.senate.gov/imo/media/doc/KupchinskyTestimony080612p.pdf, 2–3; Smith, “Lack of Transparency in the Russian Energy Trade,” 5–6.

252 Aslund, “Big Setbacks Give Gazprom Impetus for Change.”

253 Robert F. Price, “Energy Reform in Russia and the Implications for European Energy Security,” Demokratizatsiya: The Journal of Post-Soviet Democratization 15, no. 4 (October 2007), 406.


255 Stephen J. Blank, ed. “Can Russia Reform? Economic, Political, and Military Perspectives.” Strategic Studies Institute-U.S. Army War College. Accessed August 1, 2012. http://www.strategicstudiesinstitute.army.mil/pubs/display.cfm?pubID=1111, 38; Aslund, “Big Setbacks Give Gazprom Impetus for Change.”

72

likelihood of infrastructure overhaul or investment—if private enterprises exist in the

energy sector.256 Although these changes to the domestic market may appear lofty,

Russian leaders seem to grasp their dire reliance on the hydrocarbon industry. Yet, they

will have to contend with the Kremlin to reform the energy sector.

Russian political elites have voiced support for improving the domestic energy

market. Both President Medvedev and Putin affirmed that economic modernization is the

key to reducing Russia’s reliance on hydrocarbon exports.257 To codify this political

objective, the Ministry of Energy of the Russian Federation stated in the Energy Strategy

of Russia for the period up to 2030, “The main objective of the Strategy is to set up

innovative and efficient energy sector in Russia meeting the energy needs of a growing

economy, as well as the foreign economic interests of the country.”258 In order to

achieve this goal, the Ministry of Energy proposed: developing a competitive market

environment, establishing a “stable institutional environment within the energy sector,”

improving energy efficiency in the Russian economy, and shifting economic reliance

from hydrocarbons exports to high-technology production.259 Although political elites

understand the issues facing the energy sector and required solutions, Russian power

brokers may prevent these necessary reforms.

Despite identifying the critical need to transform the Russian economy, Moscow’s

political will appears to be weak. The stagnation of Russia’s energy sector would seem to

be a significant catalyst for transition to free market principles—listed as a necessary

solution by the Energy Ministry, but Russian leaders, going back to the Tsars, have

historically preferred delegating authority over realms of the empire in exchange for

money, reward, or political support.260 Putin has had over a decade to recover from

Yeltsin’s kleptocratic systems, but he has merely installed a new version of rent seeking

256 Price, “Energy Reform in Russia,” 406.

257 Shleifer, “Why Moscow Says No,” 3.

258 Ministry of Energy of the Russian Federation, “Energy Strategy of Russia,” 15.

259 Ibid.,” 12, 15–16.

260 Blank, “Can Russia Reform?” 40

73

through Kremlin control of “strategic” industries.261 Rosneft’s October 17, 2012 by-out

offer for TNK-BP is the most recent example of Kremlin consolidation. This deal was so

significant that it required the formal approval of Vladimir Putin. If BP accepts Rosneft’s

offer, the state-backed firm will become the world’s largest oil producer. Furthermore,

BP will lose its position as the only foreign firm with veto rights in a Russian consortium.

Rosneft’s purchase of TNK-BP may also prevent BP from entering a consortium to

explore the artic—further limiting Russia’s development of new energy fields.262 In

addition to Moscow’s control of the energy sector, actors outside the Kremlin may also

stymie necessary domestic reforms. Oligarchs in the manufacturing industry will likely

oppose the removal of energy subsidies, which will raise operating costs and decrease

their profits.263 Yet, Putin’s imprisonment of Mikhail Khordokovsky—former owner of

Yukos Oil— in May 2005 has appeared to curb oligarchic protestation. Some observers

believe the economy’s reliance on hydrocarbon exports may divert Russia from investing

in human capital and new technologies—including those in the energy field, which will

force Russia to cope with the industry and technology it currently employs.264 Yet,

innovations in the gas industry—outside Russia—may be the greatest catalyst for

transforming the domestic market.

There are signs that Russia industry leaders can reform. According to Robert

Peston, BBC News Business Editor, the BP-TNK purchase should be viewed as an

indication of “Rosneft’s gradual privatization and its ambition to be seen as one of the

world’s most powerful oil companies.” The TNK-BP purchase may give BP twenty

percent share in Rosneft. Consequently, the Russian oil firm will likely have access to

BP’s trade techniques, technology, management experience, and budgeting methods.

Moreover, the addition of BP in the Rosneft firm will enable Russia’s oil giant to attract

261 Blank, “Can Russia Reform?” 50.

262 Robert Peston, “Will BP be bruised by Russian bear?” BBC News, October 22, 2012, accessed November 21, 2012, http://www.bbc.co.uk/news/business-20026068; “BP and Rosneft: Unhappy Families,” Economist, October 20, 2012, accessed November 21, 2012, http://www.economist.com/news/business/21564914-russia%E2%80%99s-state-controlled-oil-giant-bids-become-new-supermajor-where-does-leave-bp.


264 Quester, “Energy Dependence and Political Power,” 448; Price, “Energy Reform in Russia,” 406.

74

international investors. Exposure to BP’s business practices and a new opportunity to

attract international investors will likely be an impetus for Rosneft’s managers to remove

the company from the Kremlin’s grasp.265 Additionally, there are signals that Gazprom

is preparing for a similar move away from Moscow’s control. Despite decades of

supporting Russian economic development, the depletion of Gazprom field—with little

prospect of new development—coupled with lack of profits in the domestic sector and

high operating costs are a strong incentive for Gazprom to remove itself as a “national

donor” in order to ensure the company’s survival and profitability.266 Signs of Gazprom’s

struggle against the Kremlin have manifested themselves in Russian energy disputes.

Russia’s 2006–2007 energy clashes with Ukraine and Belarus were likely maneuvers to

gain equity stakes in both nations transit infrastructure—not political disputes. In 2007,

the Belarusian government was a political ally of the Kremlin; however, Moscow set a

firm deadline for Belarus to surrender control of transit company, Beltrangaz, or begin

paying market prices for energy. These early conflicts demonstrate that Russia sought

control of downstream gas routes and intermediary companies instead of managing

domestic politics in former Soviet and Warsaw Pact states. Gazprom’s economic goals

have led Russia into precarious relations with its European customers and may be a

critical factor in many future policy decisions. Thus, Moscow may make imprudent

foreign policy choices—such as supporting unstable dictators in Turkmenistan and

Uzbekistan or aggravating tension with China over competition for energy resources in

Central Asia—in Gazprom’s search for capital gain.267 Despite Putin’s use of legal and

extralegal means to influence the hydrocarbon industry and the pervasive corruption in

the energy sector, powerful lobbies within the energy sector already exist and have

persistently pushed for internal reforms to decrease energy subsidies and move towards

liberalizing the energy industry to increase profits, international investment, and

265 Peston, “Will BP be bruised by Russian bear?”


267 “Does Gazprom’s Tail Wag Russia’s dog?” May, 22, 2008, Jane’s Intelligence Review, accessed November 9, 2012, http://search.janes.com/Search/documentView.do?docId=/content1/janesdata/mags/jiwk/history/frp2006/frp70012.htm@current&pageSelected=allJanes&keyword=Gazprom%2C Beltransgaz&backPath=http://search.janes.com/Search&Prod_Name=JIWK&.

75

competiveness in the world energy market. Moreover, the primary goal of Russian energy

companies is to make a profit for licit or illicit reasons.268

2. External Relations

Gazprom will likely liberalize due to its desire to make profits in the European

market, if the EU continues to hold foreign companies to their internal standards. The gas

giant will find it difficult to counter the European Commission’s power to enforce EU

regulations. Moreover, the European Commission’s raids on Gazprom’s offices last year

dispelled the belief that ties with the Kremlin would give the company legal immunity.269

Additionally, Gazprom has begun conforming to EU market regulations and integrating

into the single energy market. In May 2012, Gazprom’s deputy Chairman Alexander

Medvedev stated that Lithuania authorities had pressured Gazprom into unbundling its

pipeline import and transport companies in compliance with EU requirements.270 On

September 25, 2012, in contrast to Putin’s decree, Alexander Medvedev admitted the

company is planning on unbundling its European subsidiary companies to comply with

EU antitrust laws and Third Energy Package.271 Although Gazprom has voiced its

willingness to comply with EC requirements, the company’s share price has dropped, and

Gazprom will likely receive fines and incur legal fees that could catalyze spending

adjustments and improve management techniques to recover lost revenue.272

Gazprom’s future share of the European gas market will likely be substantially

reduced due to LNG and shale gas developments. The EU’s planned LNG facilities can

sustain two-thirds of the EU’s projected gas requirements in 2020.273 LNG and minor

shale development in Europe will likely erode Russia’s monopolistic footing or preclude

268 Quester, “Energy Dependence and Political Power,” 450.

269 Ibid.

270 “PM: unbundling of Lithuanian Gas’ operations - outcome of talks with shareholders,” Baltic News Service, May 29, 2012, accessed November 5, 2012, http://www.lexis-nexis.com/.

271 Rosemary Griffin, “Gazprom looks to Restructure European Gas Assets,” Platts Oilgram News, September 26, 2012, accessed November 6, 2012, http://www.lexis-nexis.com/.

272 “Gazprom shares down as EU opens antitrust probe,” Huffington Post –Business, September 5, 2012, accessed November 23, 2012, http://www.huffingtonpost.com/huff-wires/20120905/eu-russia-gazprom/.

273 Teusch, “Shale Gas and the EU Internal Gas Market: Beyond the Hype and Hysteria,” 6.

76

the formation of a functional gas cartel. According to U.S. anti-trust policies, if four

countries or companies control over fifty percent of a certain market, then collusion is

able to occur without economic backlash. Simply put, the “4/50 rule of thumb” affirms

cartels cannot exert control if non-cartel providers supply over fifty percent of the

market.274 Prior to expansion in European LNG imports, Russia’s market position

appeared uncontestable. In 2009, the EU-27 imported forty-three percent of its natural

gas from Russia.275 Furthermore, close to four-fifths of the EU-27’s imports of natural

gas in 2009 came from Russia, Norway, or Algeria.276 Yet, Europe’s LNG imports

primarily originated in Qatar (forty-one percent), Algeria (twenty-two percent), and

Nigeria (eighteen percent) by May 2012.277 This expansion in LNG trade has diversified

Europe’s exports from Russian dominance. Consequently, continued LNG investment

could reduce Russia’s stake in non-FSU Europe to thirteen percent by 2040.278 Thus,

Gazprom’s position in the European market will likely continue to weaken and Brussels

may begin to exert leverage vis-à-vis Moscow. Decreased European demand for Russian

gas and increased global gas reserves continue to drive down European natural gas spot

prices, and Gazprom’s oil indexed prices cannot compete with these lower LNG spot

prices.279

The Kremlin and Russia’s Energy Ministry understand Russia’s position vis-à-vis

Europe. Gazprom needs to sell its gas on the European market. Russia’s pipeline system,

and lack of pipelines to Asia, requires most Russian gas to be sold in the European

market. Moreover, Russia’s domestic economy and political stability are founding on

hydrocarbon exports.280 In 2000, before Putin became Russia’s President he declared,

274 Moran, “The Globalization of America’s Defense Industries: Managing the Threat of Foreign

Dependence,” 80–81.


276 European Commission – Eurostat, “Energy production and imports.”




280 Quester, “Energy Dependence and Political Power,” 447.

77

“There can be no superpower where weakness and poverty reigns.”281 This affirmation

was reiterated in Putin’s recent statement that Russian economic strength is its greatest

tool in foreign policy.282 Russia’s current energy strategy implies that Europe and the

CIS will remain the primary consumer market through 2030. Consequently,

“maintenance of Russia’s stable relations with its traditional consumer of energy

resources and development of equally stable relations on new energy markets will be one

of the key principles.”283 Therefore, Russian gas cutoffs may not be a sign of political

control of powerful energy blackmail. The gas-wars in Eastern Europe have not increased

Moscow’s power, but publicized Gazprom as an unreliable energy provider.284 By

ceasing gas deliveries to Ukraine in 2009, Russia angered it largest consumer market and

catalyzed Europe’s drive for energy diversity. According to Andrei Shleifer, Professor of

Economics at Harvard University, “That the Kremlin had to shoot itself in the foot to get

Kiev’s attention reveals the limits of its blackmail power.”285 Despite past episodes of

energy blackmail, bountiful hydrocarbon assets have not guaranteed Russian political

control in former Soviet and Warsaw pact states. For example, the Czech Republic,

Estonia, and Poland—three of the states most dependent on Russian energy—have all

recently joined NATO, offered to host NATO missile defense, and openly criticized

Russian policy.286 Gazprom is facing a European gas market—the only market that

Russian gas companies can make substantial profits—that is diversifying away from

Russian gas and instituting reforms that will weaken the Kremlin’s ability to demand

preferential treatment. Moscow’s response to the European Commission’s 2012 antitrust

case against Gazprom provides an opportune lens to view Russia’s ability to adjust to

evolving EU-Russian energy dynamics.

On September 11, 2012, President Putin responded to the European

Commission’s antitrust investigation of by signing an official decree that forbade


282 Putin, “Russia in a Changing World.”

283 Ministry of Energy of the Russian Federation, “Energy Strategy of Russia,” 22–23.




78

“strategic” firms from negotiating or cooperating with “foreign investigations” with

Moscow’s permission.287 He also commented, “The EU subsidized the economies of

Eastern European countries…Now it seems someone in the EU has decided to shift part

of the burden, some of the subsidies, onto us.”288 Thus, Putin’s reactions to the antitrust

probe display a lack of understanding of market forces and a desire to control Gazprom’s

integration into a free market system. In addition to the Kremlin decree, some analysts

believe Moscow has used pricing to punish nations that are moving forward with EU

market reforms, such as Lithuania and Moldova.289 Consequently, Anders Aslund—

former economic adviser to Kyrgyzstan, Russia, and Ukraine—believes Gazprom will be

“headed for the dustbin of history” because the company has become irrevocably state

controlled and will not conform to the rules of the European market; however, there are

indicators that Gazprom will survive its row with the European Commission.290 The

company may have shelved its development of the Shtokman field, but it has recently

enlarged its trading division in the United Kingdom, completed the second undersea Nord

Stream pipeline, forecasted South Stream pipeline construction for early 2013, and begun

studying recoverable shale gas deposits in Russia.291 Gazprom’s managers and investors,

driven by the desire for profits, will likely strive to keep the company engaged in the

European market—its only profitable sector. Therefore, it may be a bit early to consign

Gazprom to strategic irrelevance. Nevertheless, Russia’s diminished leverage in the

European market have also affected its position in the CIS.

Russia has traditionally sought control of the energy bridge from Central Asia to

Europe to shore-up its influence in CIS nations, former Soviet republics, and Europe, but

decreased European gas demand has propagated a rapid decline in Russia’s gas imports

from Central Asia.292 Central Asian exports to Russia are predominantly used to meet

Russia’s domestic energy needs, and Central Asian states have offset declining energy






292 Vladimir Putin, “Russia in a Changing World.”

79

relations with Russia by shifted gas exports to China, which is more desirable to the

Kremlin than Central Asian gas exporters shipping supplies directly to Europe.293

Consequently, Russia’s soft power draw and economic influence have waned. Still, some

analysts believe Russia will maintain its role as the primary military power due to

China’s non-interventionists policies.294 In the face of declining exports to Europe,

Russia has contemplated increasing exports to eastern markets (China, Korea, Japan, and

Taiwan). Russia’s energy ministry asserts that its energy firms must alter their role in the

international market by diversifying export destinations.295 Yet, current pipeline

infrastructure cannot support a large-scale shift to the east. Moreover, Russian exports to

this region may only increase by thirteen percent through 2040, which would give

Moscow less geopolitical impact than it probably desires.296 Russian energy prospects

may appear bleak, but the IEA projects that Russia will remain the world’s largest gas

supplier through 2035.297 This gas will find a market, if it is priced competitively and

conforms to regulations in consumer nations. Nevertheless, the waning power of Russia’s

“energy weapon” has repercussion in the Caspian Region and the EU as well.

B. CASPIAN REGION: FUTURE OF THE “NEW NORTH SEA”

The Caspian region has traditionally been hailed as a linchpin of European energy

diversity; however, expansion of unconventional natural gas technologies (shale and

LNG) has altered the region’s role in Eurasian energy relations.298 After the collapse of

the Soviet Union, Europe and the United States anticipated a Caspian boon to the global

energy market. Some analysts referred to the region as the New North Sea and predicted

that Caspian exports would provide eight percent of the world’s future oil supply.

293 Denison, “Game Over?” 5; Shleifer, “Why Moscow Says No,” 5.

294 Henrik Bergsager, “China, Russia and Central Asia: The Energy Dilemma,” FNI Report 16 (Fridtjof Nanses Institut, September 2012), accessed November 5, 2012, http://www.fni.no/doc&pdf/FNI-R1612.pdf, 18; Laruelle, “Russia ‘is a Delicate Matter?’” 4.

295 Ministry of Energy of the Russian Federation, “Energy Strategy of Russia,” 23.

296 Bergsager, “China, Russia and Central Asia,” 6; Medlock, Shale Gas and U.S. National Security, 47.

297 International Energy Agency, World Energy Outlook 2011, 155.


80

Moreover, the region was viewed as a solution to reliance on Middle Eastern oil and its

geographic position between Asia and Europe made it an essential component of the

natural gas bridge to Europe.299 Other analysts have tempered these excited forecasts

with predictions of hydrocarbon shortages leading to intense conflict. For example,

Michael Klare, U.S. defense policy and oil analyst, believes military confrontation

between the United States and China over Central Asian energy sources is an emerging

reality.300 Yet, there is a current oversupply of natural gas in the global market due to

new technology to extract unconventional gas sources and the globalization of the gas

market through LNG technology. Russia’s share of Europe’s natural gas market has

receded due to LNG shipments sold at lower spot prices, which has significantly reduced

Gazprom’s need for Central Asian gas. Currently, Russia uses natural gas from

Turkmenistan and Kazakhstan to meet its domestic energy needs.301 Therefore, shale gas

and LNG have nearly eliminated the threat of intense natural gas competition in the

Caspian. Although this de-escalation of resource competition may be a positive indicator

of reduced energy conflicts, the Caspian will likely be irrevocably changed.


After the Soviet era, the diverse South Caucasus and Central Asian littorals were

often viewed as one region—the Caspian. However, a unified role in energy relations will

likely never materialize in the Caspian Basin. Despite monetary investment and

diplomatic endeavors from the EU and United States, Central Asian gas has not been able

to bridge the Caspian Sea. Nevertheless, a December 2012 Minority Staff Report for the

U.S. Senate Committee on Foreign Relations proposed leveraging Russia’s weakened

energy relationship vis-à-vis Europe to reenergize development of the Southern gas

corridor and support U.S. policy aims to further isolate Iran, foster independence of FSU

299 Cohen, “Energy Security in the Caspian Basin,” 124; Robert Ebel and Rajan Menon, ed., Energy

and Conflict in Central Asia and the Caucasus (New York: Rowman & Littlefield Publishers, 2000), 1 & 126.

300 Cohen, “Energy Security in the Caspian Basin,” 110; Klare, “There Will Be Blood,” 59.

301 Denison, “Game Over?” 1, 3–4.

81

sates in the Caucuses and Central Asia, and diversify NATO gas sources.302 Yet,

Azerbaijan is the key center of the Southern gas corridor as the gateway for Central Asian

gas. In addition to the hurdles to a trans-Caspian pipeline examined in the first chapter of

this thesis, persistent risk of Caspian maritime conflicts may preclude foreign investment.

Although Azerbaijan and Turkmenistan recently ended their naval confrontation over

ownership of the Serdar/Kyapaz gas field in the Caspian, this conflict may resume

unexpectedly. Additionally, Iran and Azerbaijan could clash over the Sardar Jangal oil

field in the proximity of their disputed maritime border as they have in the past.303 These

conflicts render Caspian seabed delineation unlikely, which is pivotal to developing a

trans-Caspian energy bridge. Most hydrocarbon assets on the western coast (Azerbaijan)

will likely continue to head to west via the BTE pipeline, while resources from the east

littorals (Kazakhstan and Turkmenistan) will continue to be exported north to Russia and

east to China.304 The BTE and Baku-Tblisi-Ceyhan (BTC) pipelines have empowered

Baku to drift from Moscow’s sphere of privileged interest towards the west, and Azeri

gas is expected to directly link into European markets before 2020.305 Incidentally,

Turkey may become a more significant player in the Caspian gas market. In 2011,

Azerbaijan and Turkey signed a bilateral energy deal to construct the Trans-Anatolian

Pipeline (TANAP). This project is the first forward movement in the Southern gas

corridor since 2009. This pipeline is projected to deliver sixteen bcm/year of natural gas

to supply Turkey and Central Europe.306 Thus, Azerbaijan will likely continue to drift

west.

302 United States Senate, “Energy and Security from the Caspian to Europe,” A Minority Staff Report

prepared for the use of the Committee on Foreign Relation, accessed January 11, 2013, http://www.foreign.senate.gov/publications/download/energy-and-security-from-the-caspian-to-europe 2 & 5.

303 Ibid., 3; Caspian Research Institute, “The Caspian: Predictions for 2013,” January 2, 2013, accessed January 11, 2013, http://caspianresearch.com/2013/01/02/the-caspian-predictions-for-2013/.

304 Alexandros Petersen, “In the Hunt for Caspian Gas, the EU Can Learn from China,” European Policy Center, 17 October 2012, Accessed November 6, 2012, http://www.epc.eu/documents/uploads/pub_2991_in_the_hunt_for_caspian_gas.pdf, 1; Ebel, Energy and Conflict in Central Asia and the Caucasus, 124.


306 United States Senate, “Energy and Security from the Caspian to Europe,” 3.

82

Conversely, Central Asian gas reaches less of the European and Russian markets

and is increasingly exported to China.307 Central Asian hydrocarbon exporters have

become adept at playing Russia, China, and Europe against the other to obtain the

relationship most conducive to Central Asian foreign-policy interests and sovereignty,

but unconventional gas technologies have reduced the competition for Central Asian gas

and proximate bargaining power of Central Asian hydrocarbon exporters. Turkey has

expressed interest in purchasing gas from Turkmenistan; however, a trans-Caspian

pipeline would be required to deliver this energy supply to the Turkish market. Moreover,

Azerbaijan is projected to control fifty-one percent of the proposed TANAP conduit to

Turkey. Therefore, Baku could prevent Turkmen gas from reaching Turkey: recent and

historical gas disputes between the two states make this likely.308

Unconventional natural developments, coupled with a lack of export routes to

Europe, render China the most attractive customer—possibly the sole customer—for

Central Asian gas, which could severely limit these republics’ maneuver room in future

energy negotiations.309 China has successfully utilized a strategy of offsetting Russia’s

political influence with economic integration through the SCO and energy backed

loans.310 EU interests in Central Asia will not likely focus on hydrocarbon extraction,

and Russia’s reduced need for Central Asian energy may result in diminished influence in

the region.311 Moreover, Russia’s waning impact and China’s non-interventionist

approach will directly impact Central Asian internal policies.


In Central Asia, hydrocarbon profits are often used to enrich and empower ruling

elites, drive economic development, and maintain sovereignty; yet, unconventional gas

307 Bergsager, “China, Russia and Central Asia,” 15.

308 United States Senate, “Energy and Security from the Caspian to Europe,” 3–4.

309 Jean A. Garrison and Ahad Abdurahmonov, “Explaining the Central Asian Energy Game: Complex Interdependence and How Small States Influence Their Big Neighbors,” Asian Perspective 35 (2011), 399; Denison, “Game Over?” 5.

310 Bergsager, “China, Russia and Central Asia,” 15, 18.

311 Mankoff, “Eurasian Energy Security,” 36; Laruelle, “Russia ‘is a Delicate Matter?’” 3; Bergsager, “China, Russia and Central Asia,” 9.

83

developments have altered the motor of this dynamic—great power competition.312

Michael Denison, former Special Adviser to the UK Secretary of State for Foreign and

Commonwealth Affairs, predicts that the lack of resource competition for Central Asian

gas will result in energy geopolitics becoming the “local politics of energy.”313 If the

local politics of energy leads to domestic political upheaval, Central Asian leaders will

likely have to handle internal challenges on their own. Russia may refuse to intervene due

to strategic consideration or lack of capabilities; moreover, Moscow’s recent inability to

follow through on political and investment promises may highlight a lack of commitment

to the region. China’s economic-driven, non-intervention strategy does not fill the

vacuum of waning Russian support for Central Asian leaders.314 Therefore, the lack of

resource competition, has provided Central Asian leaders the greatest sovereignty of all—

freedom to manage domestic policies and responsibility for maintaining domestic

stability.

C. EUROPEAN UNION: MARKET LIBERALIZATION—THE CRITICAL

INFRASTRUCTURE


EU member states have long employed energy nationalism as Gunther

Oettinger—EU Energy Commissioner—cautioned, “Energy supplies are simply too

important to view as a national prerogative.”315 Thus, a unified energy market may be

the “critical infrastructure” to fulfilling EU energy security. Although the 1973 Arab

Embargo illustrated that national companies do not buffer a state from upstream

manipulation, European nations have traditionally relied on national champions to foster

energy security. During this oil crisis, the United Kingdom was still subjected to OPEC

pressure because BP followed the guidance of OPEC instead of the UK.316 Moreover,

312 Denison, “Game Over?” 1; Cohen, “Energy Security in the Caspian Basin,” 118.

313 Denison, “Game Over?” 5.

314 Bergsager, “China, Russia and Central Asia,” 9; Laruelle, “Russia ‘is a Delicate Matter?’” 4.

315 Oettinger, “Energy Security for Europe.”

316 Moran, ““The Globalization of America’s Defense Industries: Managing the Threat of Foreign Dependence,” 59.

84

large EU energy firms and their patron governments—such as France, Germany, and

Italy—have stalled efforts to create an internal European energy market.

LNG innovations may provide the decisive incentive to unify Europe’s energy

market. This energy source has provided physical liquidity to global markets, enabled EU

member states to respond to single supply shocks, and lowered gas prices through

arbitrage with Russia.317 Nevertheless, European LNG terminal often operate at fifty-

percent capacity. This untapped vital infrastructure illuminates an imbalance in the

internal market. Most EU LNG terminals are in Western Europe, while Eastern European

member states—most susceptible to energy disruptions—have no LNG terminals to

diversify supplies. Therefore, LNG imports to the west could be a critical tool to ensure

energy security in Eastern Europe. Oettinger affirms, “Just take the example of the gas

crisis in January 2009. If the internal market had been functioning and the necessary

infrastructure had been in place to transport gas to where it was needed, nobody would

have had to stay in the cold.”318 Incidentally, this event has spurred EU investment in

LNG terminals, like the Świnoujście terminal in Poland, and pipeline interconnectors to

all member states by 2015.319



319 Ibid.”

85

Baltic and Central-Eastern European Market Interconnection Plans320 Figure 5.

The EU is well on its way to building an extensive interconnector network in the

FSU and former Warsaw Pact territory. Poland is currently connected to Germany and

Belarus through the Laow and Teterovka interconnectors; interconnector pipelines

already link Hungary with Romania and Croatia; connection pipelines are currently under

construction from Bulgaria to Romania; Hungary and Slovakia have dedicated funds to

construct an interconnector by 2015; and Bulgaria will begin another pipeline connection

to Greece next year. In 2008, the European Commission (EC) listed the interconnection

of the Baltic Region as one of its six “priority energy infrastructure projects” with the

goal of integrating the three Baltic States into the European market. This Baltic European

Market Interconnector Plan requires the construction of 18 pipelines. Two of the

interconnectors have already been completed. Of the sixteen current projects, only one

has been delayed due to funding constraints. Moreover, the EC is examining the

feasibility of building a North-South gas interconnector from the Baltic Sea to the

Adriatic Sea that is estimated to reduce gas purchase prices by 15 percent compared to

320 European Commission, “Energy: Baltic Energy Market Interconnection Plan,” accessed

November 23, 2012, http://ec.europa.eu/energy/infrastructure/bemip_en.htm; European Commission, “Energy: North-South Interconnections in Central-Eastern Europe,” accessed January 10, 2013, http://ec.europa.eu/energy/infrastructure/north_south_east_en.htm.

86

2011.321 Despite the apparent success of the EU’s interconnector programs, providing

political capital for new infrastructure projects should not be Brussels’ primary focus.

Regulatory framework is the key hurdle to a unified market.

Instead of expending political will on infrastructure projects (pipelines, LNG

facilities, storage terminals, and shale extraction), EU energy security may be better

realized through regulatory action that leverages dynamic unconventional gas resources.

While European shale gas production has received much media attention, it will not

sufficiently alter energy dynamics in the short-term and the “shale gas hype” may

actually reduce member states’ political support for internal market integration.

Moreover, a European level approach to shale gas exploration that requires transparency

and monitors environmental impacts will likely be required before large scale European

shale exploration materializes.322 Yet, national efforts to engage the public on shale gas’s

merits may not yield significant results, but prioritizing market integration over lobbying

for specific energy technologies will likely bolster long-term shale gas development.

Investors will be assured of a more stable and inclusive European gas market.323 Simply

restated, energy firms are more likely to invest when they are certain their gas will reach

demanding consumers. For example, North America’s unbundled market structure was a

critical factor that enabled the U.S. shale gas boom because smaller firms could enter the

shale gas market with confidence their gas would reach U.S. domestic customers.324

Moreover, the U.S. shale gas boom has directed greater quantities of LNG to Europe, but

increased LNG imports to Western Europe does not guarantee EU energy security.

321 “Think Tank Sees Hungarian Slovak Pipeline as Advantageous,” BBC Monitoring Europe, July

31, 2012, accessed November 15, 2012, http://www.lexis-nexis.com/; “Gaz-System to Decide on Cross-Border Investments in 2013,” Polish News Bulletin, September 17, 2012, accessed November 15, 2012, http://www.lexis-nexis.com/; “Bulgarian Economy Minister, Diplomats Discuss Energy Strategy, Efficiency,” BBC Monitoring Europe, October 4, 2012, accessed November 16, 2012, http://www.lexis-nexis.com/; European Commission, “Baltic Energy Market Interconnection Plan;” European Commission, “Baltic Energy Market Interconnector Plan—Fourth Progress Report,” June 2012, accessed November 23, 2012, http://ec.europa.eu/energy/infrastructure/doc/20121016_4rd_bemip_progress_report_final.pdf, 14–21.

322 Stevens, “The ‘Shale Gas Revolution’” 8.

323 Teusch, “Shale Gas and the EU Internal Gas Market,” 7–8.


87

Building interconnectors is a step to bridging the east/west gas divide, but

unifying the European energy market is the most important energy security requirement

and most likely method to reduce the geopolitical risk of dependence on Russian

energy.325 The EU’s Third Energy Package, adopted on September 19, 2007, addresses

the shortfalls of creating an internal gas market. The goal of this legislation was to create

a competitive gas market—open to all suppliers—through the unbundling of pipeline

systems, cooperation of national regulators, and investigation of monopolistic

companies—regardless of national ownership.326 Yet, the EU’s energy directive was

poorly implemented due to lack of interest and incentive because large European energy

suppliers utilized long-term pipeline contracts and enjoyed near monopolies in their

respective domestic markets.327 Moreover, many European energy companies were

national champions that held sway over their governments through political lobbying.

Several EU member states with strong energy ties to Russia—Germany, France, and

Italy—have blocked Brussels’ moves towards market integration for over a decade.328

Thus, the EU’s goal to complete the internal energy market by 2015 appeared in

jeopardy; yet, several events indicate a shift in member states’ political will to liberalize

Europe’s gas market.329 The 2009 Russo-Ukrainian gas dispute galvanized member state

support—even from Germany—for greater market integration.330 In February 2011, EU

Heads of States and Governments reaffirmed their commitment to remove all barriers to

325 Natali, “The U.S. Natural Gas Revolution,” 29; Anderson, “Europe’s Dependence on Russian

Natural Gas,” 48; Mankoff, “Eurasian Energy Security,” 38.

326 Howard V. Rogers, “LNG Trade-flows in the Atlantic Basin: Trends and Discontinuities,” Oxford Institute for Energy Studies, March 2010, accessed November 23, 2012, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2010/11/NG41-LNGTradeFlowsInTheAtlanticBasinTrendsandDiscontinuities-HowardRogers-2010.pdf, 20; European Commission, “Single market for gas & electricity,” accessed November 6, 2012, http://ec.europa.eu/energy/gas_electricity/legislation/legislation_en.htm.

327 Rogers, “LNG Trade-flows in the Atlantic Basin,” 20; Natali, “The U.S. Natural Gas Revolution,” 25.

328 Natali, “The U.S. Natural Gas Revolution,” 26; Mankoff, “Eurasian Energy Security,” 27–28; Michael Cohen, “Russia and the European Union: An Outlook for Collaboration and Competition in European Natural Gas Markets,” Demokratizatsiya: The Journal of Post-Soviet Democratization 15, no. 4 (October 2007), 388.



88

the internal energy market by 2014.331 Most recently, the EC has begun to enforce the

Third Energy Package by referring delinquent member states to the EU Court of Justice.

On October 24, 2012, Slovenia and Poland were both accused of “failing to fully

transpose the EU internal energy market rules.” Furthermore, the EC declared that other

member states might be referred to the Court of Justice.332 As a result, national

governments have forced monopolistic energy companies—including those Gazprom

partially owns—to divest assets and unbundle pipeline ownership in compliance with the

Third Energy Package.333 Still, pipeline unbundling is not the most significant obstacle

to bridging the east/west gas divide.

Eastern European states could diversify energy supplies—increasing EU energy

security—if the EU improved regulations to render cross-border shipping faster and

easier. Lack of coordination among member states and the preponderance of Transport

System Operators (TSOs) make cross-border gas flows inefficient. For example, a gas

supplier must ensure that the transport capacities requests submitted to several TSOs

(often one per member state) match along the entire transport route. This coordination is

difficult because member states and TSOs have different compliance rules and varying

systems to allocate pipeline capacity and manage gas flows.334 Consequently, Eastern

European states are unlikely to reap the benefits of increased LNG development in

Western Europe under the current cross-border framework. Yet, the EC’s enforcement of

unbundling pipeline ownership could positively impact cross-border trade. Many vertical

gas monopolies, forced to divest national pipeline infrastructure ownership, have begun

consolidating holdings across borders. These horizontal acquisitions may actually bolster

cross-border harmonization as large companies will to seek streamline gas shipments to

increase profits.335 Removing barriers to cross-border gas trade, possibly through the

331 European Commission, “Internal energy Market: Commission Refers Poland and Slovenia to

Court for Failing to Fully Transpose EU Rules,” Press Release—October 24, 2012, accessed November, 23, 2012, http://europa.eu/rapid/press-release_IP-12–1139_en.htm.”

332 Ibid.

333 Natali, “The U.S. Natural Gas Revolution,” 26; “PM: Unbundling of Lithuanian Gas’ Operation,” Baltic News Service.”

334 Natali, “The U.S. Natural Gas Revolution,” 15, 18–19.


89

implementation of an EU energy passport and European-level oversight, could enable a

small, independence energy firm to import LNG in Western Europe in order to sell this

gas in Central and Eastern Europe. Thus, internal policies will deliver the greatest boon to

EU energy security, which will also on influence foreign energy relations. Oettering

assert, “The completion of the internal market and a strong external voice are two sides of

the same coin.”336 The internal market will allow the EU to leverage LNG and minor

shale developments to strengthen its poison vis-à-vis unreliable and aggressive energy

providers.


The Eurasian Energy Bridge has been rife with insecurity. Moscow has used gas

disruptions and price disputes or threatened to impose these sanctions over forty times

since the collapse of the Soviet Union—reflecting the Kremlin’s willingness to use its

hydrocarbon assets for political blackmail. Russia’s actions illustrate that Moscow

believes customer governments will not challenge Russia’s aggressive energy

diplomacy.337 Moscow’s resolve to be the “key center” of the energy flow to Europe is

also resilient as evidenced in President Putin’s decree to block the EC’s anti-trust

investigation of Gazprom. Yet, unconventional natural gas has bolstered EU geopolitical

clout—concerning energy relations—because LNG addresses the fundamental principles

of energy security: diversification of supply, system buffers to serve against supply

shocks, and recognition of “the reality of integration.”338

EU customers have several alternatives to Russian gas through LNG shipments.

In 2012, Europe’s LNG imports primarily originated in Qatar, Algeria, and Nigeria. In

the future, the EU’s most likely LNG providers will be Qatar, Saudi Arabia, the United

Arab Emirates, Algeria, Nigeria, and possibly Iran. In order to prevent an LNG monopoly

or cartel, Richard Anderson—a Senior Fellow in the George C. Marshall Center’s


337 Ghaleb, “Natural Gas as an Instrument of Russian State Power,” 127; Cohen, “Russia: The Flawed Energy Superpower,” 92–93.

338 Daniel Yergin, “Ensuring Energy Security,” 7; Quester, “Energy Dependence and Political Power: Some Paradoxes,” 450.

90

College of International and Security Studies—suggests balancing upstream investments

so that no particular supplier acquires more than 20 percent of the EU LNG import

market.339 Brussels’ near-realization of an integrated market enables LNG to serve as a

system buffer as well through redirecting LNG shipments to areas most affected by

supply disruptions or providing natural gas from storage facilities via the interconnector

network. Despite the hurdles to constructing a unified energy market, facing “the reality

of integration” in the globalizing gas market may be the EU’s most precarious energy

security endeavor.

As the natural gas market globalizes through unconventional innovations,

Yergin’s “reality of integration” principle assets energy security will depend greatly on

foreign relations. Oettinger echoes Yergin’s principle: “To exploit the EU’s geopolitical

potential, we must reinforce our cooperation with strategic partners…with the objective

of promotion regulatory convergence.”340 Despite Russia’s unreliable history, it will

remain the largest gas exporter in the world and Gazprom will likely provide significant

supplies to Europe’s natural gas market. Therefore, energy security vis-à-vis Russia

should be approached with a dual approach: integrating Russia into the European market

to decrease its ability to leverage energy blackmail, while diversifying energy sources to

ensure that integration with Gazprom does not heighten energy dependence.

Furthermore, diversification may compel Moscow to integrate in a mutually reinforcing

feedback loop. The EC’s September 4, 2012 antitrust probe against Gazprom showed the

Kremlin that if Russia does not conform, it will lose significant market share, especially

in Eastern Europe—where the Kremlin is keen to exercise influence. Moreover, the EC

will probably fine Gazprom billions of Euros and deem oil-linked prices, long-term

contracts, take-or-pay clauses, and prohibitions against reselling gas anti-competitive.341

Consequently, Gazprom’s business model will require significant changes. Enforcing the

Third Energy Package regulations will also make it difficult for Russia to employ

339 Medlock, Shale Gas and U.S. National Security, 45; Anderson, “Europe’s Dependence on Russian

Natural Gas,” 50.

340 Yergin, “Ensuring Energy Security,” 7; Oettinger, “Energy Security for Europe.”


91

bilateral energy relations. Furthermore, the anti-trust investigation is a message from

Brussels to member states that Gazprom is no longer treated as a special case.342

The European Union should also seek to incorporate Ukraine, Belarus, and other

non-EU FSU states into compliance with the EU’s market rules. This integration may

foster cooperation between EU, Russia, and Ukraine for infrastructure upgrades that can

provide inexpensive pipeline gas through networks owned by independent energy

firms—decreasing Russian control and Ukraine’s reliance on state-owned companies as

well. This model could be employed in Belarus as well. Integrating Russian and non-EU

firms companies into Europe’s gas market may provide inexpensive pipeline gas, in

competition with LNG sources, and foster economic interchanges with Russia. As Russia

sells its gas in the European market, it is likely to purchase high-tech and industrial goods

in return. Maintaining economic interdependence may not only reduce the threat of overt

military conflict, but also transmits European value and the benefit of market economies

to Russian leaders and citizens as well. European values could also reemerge ate the

forefront of EU engagement in the Caspian.

Most European governments have viewed the Caspian region as a key to EU

energy security. Yet, Russian and Chinese engagement has hindered Brussels’s role in the

region. Even high-level EU engagement did not secure natural gas from Turkmenistan or

forward development on trans-Caspian energy ties.343 However, unconventional gas

developments have the potential to eliminate Europe’s need for Caspian gas and diffuse

zero sum energy competition in the region. Consequently, the EU could remain a

marginal influence in the Caspian Region, especially Central Asia.344 Some analysts

believe western governments and firms should model its energy relations after China’s

use of energy backed loans and limited political involvement.345 Yet, Russia’s lack of

342 Mankoff, “Eurasian Energy Security,” 25 & 31; “Burst Valves: The European Union squeezes

Gazprom. Russia retaliates, “ Economist.

343 Neil Melvin, “The EU Needs a New Values-Based Realism for its Central Asia Strategy,” Europe-Central Asian Monitoring, Policy Brief No 28, October 2012, accessed November 6, 2012, http://www.fride.org/download/PB_28_Eng.pdf, 2.

344 Melvin, “The EU Needs a New Values-Based Realism,” 1–2, 5; Denison, “Game Over?” 4; Cohen, “Energy Security in the Caspian Basin,” 110.

345 Bergsager, “China, Russia and Central Asia,” 18; Petersen, “In the Hunt for Caspian Gas,” 2.

92

will and ability to support Central Asian leaders and China’s non-intervention stance

provides Europe an opportunity to reopen dialogues with Central Asian leaders that focus

on long-term strategies and development instead of short-term EU policy goals.

Brussels’s efforts to obtain Caspian hydrocarbons have often prevented the development

of consistent policies towards growth and stability in the region, but shifting Eurasian

energy dynamics may facilitate European engagement in the Caspian Region by

addresses emergent requirements and challenges in the region such as rule of law, human

rights, election monitoring, defense-level mentoring, and policing support. The EU’s

Common Security and Defense Policy’s capabilities are uniquely structured to support

EU missions to this region—in contrast with NATO and CSTO military-centric

capabilities.346 Concerning energy relations, the European Union still has the

opportunity to assist Caspian hydrocarbon producers in upstream investment and

technological development. Western investment goals in this region should focus on

providing technical assistance and fostering competitive market dynamics in the energy

sector—even if western energy security is not directly affected. Moreover, the EU could

leverage its role as a disinterested party—not requiring Caspian energy—to promote

transparency, common market rules, and rule of law to provide a stable investment

environment. These actions may not deliver Caspian energy to European markets, but can

communicate to Caspian leaders that Brussels is focused on long-term development

instead of extractive geopolitics.

D. CONCLUSION

Unconventional natural gas developments may bolster EU energy security by

providing energy diversity, the ability to respond to supply shocks, but most importantly

a key incentive for EU member states to implement a unified energy market. Beyond the

EU’s benefit, LNG and shale gas pose second and third order implications for

European/Eurasian energy relations. Russia has maneuvered to maintain its position as

the “key center” in Eurasian energy relations, but LNG has transformed traditional

346 Jolyon Howorth, Security and Defence Policy in the European Union (Basingstoke: Palgrave

Macmillan, 2007), 92–95; Melvin, “The EU Needs a New Values-Based Realism,” 3; Laruelle, “Russia ‘is a Delicate Matter?’” 4; Klare, “There Will Be Blood,” 28; Bergsager, “China, Russia and Central Asia,” 9.

93

natural gas flows. Still, hydrocarbon exports are critical to Russian economic and

political stability. In light of Russia’s waning energy influence and decreased natural gas

profits, internal reforms to Russia’s energy sector are necessary and there are signs that

Russia can reform. Despite Vladimir Putin’s endeavor to control the hydrocarbon

industry, managers and investors within the energy sector have pushed for internal

reforms to liberalize the energy industry and enable Russian companies to become more

competitive in the world energy market to increase profits.

The Kremlin’s ability to shield energy companies from foreign market rules has

also been reduced by LNG developments in Europe and Brussels’s efforts to unify the

energy market. Russia’s decreased foreign influence is another indicator of potential

reform. LNG developments have enabled price arbitrage in Europe that has shown

Gazprom as a pricey and unreliable energy provider. Moreover, Gazprom’s future share

of the European energy market is likely to diminish as LNG imports increase and

renewable energies become a larger part of the EU’s energy mix. Yet, Russia still has few

alternative customers because infrastructure to Asia has not been developed to support a

large-scale export shift. Consequently, Putin’s decree that Gazprom will not cooperate

with the EU’s anti-trust case appears empty as Gazprom has already begun unbundling

energy assets to comply with the EU’s Third Energy Package. Although it appears that

Russia is truly the dependent party, Moscow can play an important role in Eurasian

energy security. Russia possesses the world’s largest gas fields and will likely remain

the world’s biggest natural gas exporter. Gazprom can provide significant quantities of

gas to Europe, if it is priced competitively and in compliance with EU market rules.

Therefore, EU energy security strategy should utilize a dual-pronged approach:

integrating Russia into the European market and diversifying sources away from Russia

through unconventional natural gas investment. Ensuring Russian firms comply with EU

regulations will likely decrease the incidents of future energy dependence, foster

economic interdependence between the EU and Russia, and may decrease future energy

blackmail attempts as a tool of desperation to gain political attention or market share.

LNG development and decreased European demand have limited the EU’s and

Russia’s need for Caspian natural gas, which has diminished resource competition in the

94

region. Moscow’s reduced need for Central Asian energy may result in less regional

influence; conversely, China continues to offset Russia’s political power with economic

integration. China will likely remain the key energy player in the region. Moreover,

increasing Chinese natural gas demand may bring Russia and China together; however,

Russian exports to China and North East Asia may not yield the political clout that

Moscow has traditionally yield in the FSU. Thus, the impact of North East Asian energy

demand on Eurasian energy relations warrants future investigation. Russia’s waning

impact and China’s non-interventionist approach will directly impact Central Asian

domestic politics. Central Asian leaders may be unsure of political support from Russia,

China, or Europe when confronting internal threats or shifting domestic dynamics in the

regions. Because the EU will likely no longer need Caspian energy to bolster energy

security, Brussels can engage these FSU leaders to address emergent challenges such as

rule of law, human rights, monitoring, and policing. Simply restated, the EU has a unique

opportunity to transmit its values through soft power engagement tools instead of seeking

to build ties with Caspian leaders to secure hydrocarbon assets.

95

V. CONCLUSION

Unconventional natural gas innovations, such as shale gas and Liquefied Natural

Gas, have dynamically altered energy security relationships between Russia, the former

Soviet republics, and Europe. Although the Kremlin has shown that it will use energy as

a form of political coercion, LNG has diminishing Russia’s market share of European

energy imports and its ability to disrupt domestic markets—thereby blunting Moscow’s

energy blackmail attacks. Moreover, unconventional natural gas has fortified European

energy security where traditional pipeline projects have failed to diversify natural gas

resources.

Europe’s reliance on natural gas pipelines raises critical energy security concerns.

Most significantly, Russia’s dominating stake as an energy supplier allows Moscow the

potential leverage to influence individual countries. This power is evident in Russia’s

attempt to sway the unbundling and compliance activities of Lithuania and Moldova by

raising natural gas prices. Consequently, the EU has attempted to counter its energy

insecurity vis-à-vis Moscow by seeking alternative energy suppliers—a central pillar of

energy security. Yet, the EU’s attempt to expand energy resources through new pipeline

construction to Central Asia via the Nabucco project has proved unsuccessful because

Russia has stymied EU development of the Southern gas corridor. The EU’s Nabucco

project and Russia’s South Stream compete for customers, transit states, investors, and

natural gas sources. Furthermore, Nabucco faces considerable hurdles; most importantly,

lack of gas sources to render the pipeline feasible for economic investment. South Stream

is scheduled to begin construction of the most difficult and expensive section—the Black

Sea pipeline—in early 2013. Moreover, South Stream is likely to provide 30 bcm/year by

2017—before Nabucco begins producing 6 bcm/year—rendering the EU’s project

irrelevant. Thus, a trans-Caspian pipeline appears unlikely, and the EU’s strategy of

building pipelines to bypass Russia or Iran is not likely to reduce susceptibility to energy

disruptions.

Shale gas and LNG have fostered a global gas market that has begun transforming

the patterns of energy dependency. States with shorelines or shale gas deposits may no

96

longer be reliant on their neighbors for transit of energy or a regional gas exporters for

supplies. In the last ten years, the United States’ shale gas development has produced a

global surplus of natural gas, decreased gas prices, and diverted LNG supplies to Europe.

The impact of shale and LNG has led some to wonder if Europe can emulate America’s

shale gas boom to become energy independent. Due to the environmental, technological

and economic, and regulatory/public acceptance challenges to full-scale shale gas

extraction, a European shale gas boom is unlikely. Nevertheless, some EU member states

are poised to begin shale extraction, such as the United Kingdom and Poland.

Consequently, shale gas will likely serve as a buffer energy source, but not a pillar of

energy independence. Conversely, LNG has already altered the market dynamics that

govern European natural gas sales.

Increased LNG imports have created competition between Europe’s gas

suppliers—resulting in lower prices. Pipeline gas competition with LNG sources has

enabled price arbitrage in Europe and compelled Russia to sell a portion of its natural gas

at LNG spot prices. Moreover, Gazprom is viewed as a costly and undependable energy

provider. Gazprom’s future share of the European energy market will likely diminish as

LNG imports increase. As EU natural gas consumption increases, energy will likely be

required from incrementally remote locations—necessitating long-distance pipelines. As

pipeline lengths increase—raising costs—LNG will become an equally economical

energy source. Consequently, energy providers that feed long-distance pipelines may

have to accept spot pricing as the “new normal” to compete with LNG in the global gas

marketplace. Still, the most significant impact of LNG imports to Europe is that old

patterns of energy dependence are weakened. As European states build LNG terminals,

Russia’s dominance over energy exports will continue to diminish.

Liquefied Natural Gas has the potential to further revolutionize European-

Eurasian energy security dynamics. LNG’s role in European energy security can be seen

in Greece’s ability to provide natural gas to itself and in Bulgaria during the 2009 Russo-

Ukrainian energy dispute using increased LNG imports. As the EU continues to build

LNG import terminals, access to global gas sources will increase—providing a significant

alternative to Russian pipeline gas. By 2016, the EU will expand three existing facilities

97

and complete construction of six new terminals to augment the twenty-one existing LNG

import sites. Furthermore, eleven terminals are scheduled for future expansion and

twenty-eight new LNG import sites are planned for future development. Consequently,

European LNG import capacity could reach 417 bcm/year or seventy-five percent of the

EU’s natural gas imports. Yet, the location of Europe’s LNG terminals is cause for

concern. Poland is the only former Warsaw Pact or FSU state that is currently

constructing an LNG terminal. Although Eastern Europe may appear vulnerable to

Russia’s fickle energy policies, LNG terminals in Western Europe can still strengthen

Eastern European energy security if the EU develops policies and physical infrastructure

to support the internal European market.

Unconventional natural gas developments may not only bolster EU energy

security by providing energy diversity and the ability to respond to supply shocks, but

also provide a key incentive for EU member states to implement a unified energy market.

The probable maturity of a unified market is evident in the myriad interconnector

pipelines projects currently under construction in the Baltic region and Central and

Eastern Europe. Additionally, the EC’s resolve to bring violators under EC rules displays

political will to complete the internal energy market. The EC’s September 4, 2012

antitrust probe against Gazprom and October 24, 2012 referral of Slovenia and Poland to

the EU Court of Justice for noncompliance with the Third Energy Package are

compelling examples of Brussels’ desire to unify the EU energy market al.though,

Moscow’s objection to transparency and adhering to EU regulations appears stalwart,

LNG provides Europe with gas import alternatives. Conversely, Russia still has few

alternative customers because infrastructure to Asia has not been developed to support a

large-scale export shift.

The Kremlin’s ability to shield energy companies from foreign market rules has

been reduced by LNG developments in Europe and Brussels’ efforts to unify the energy

market. Hydrocarbon exports are critical to Russian economic and political stability. In

light of Russia’s waning energy influence and decreased natural gas profits, internal

reforms to Russia’s energy sector are necessary and there are signs that Russia can

reform. Despite Vladimir Putin’s actions to control the hydrocarbon industry, managers

98

and investors within the energy sector have pushed for internal reforms to liberalize the

energy industry and enable Russian companies to become more competitive in the global

energy market to increase profits. Consequently, Putin’s September 11, 2012 decree that

Gazprom will not cooperate with the EC’s anti-trust investigation appears empty because

Gazprom has already begun unbundling energy assets to comply with the EU’s Third

Energy Package. Unconventional natural gas innovations pose second and third order

implications for European/Eurasian energy dynamics beyond EU-Russian relations.

Shale gas and LNG have impacted Eurasian domestic and foreign policies. Russia

has maneuvered to maintain its position as “key center” of the Eurasian energy bridge,

but LNG has transformed traditional natural gas flows. The EU will require less gas from

Russia and Central Asia, but cancelling the Nabucco project does not abandon Central

Asia to Russian primacy. Moscow’s decreased necessity for Central Asian energy may

result in less regional influence; conversely, Beijing continues to offset the Kremlin’s

political power with economic integration and increased resource extraction. Russia’s

waning impact and China’s non-interventionist approach will directly impact Central

Asian domestic politics. Central Asian leaders may be unsure of political support from

Russia, China, or Europe when confronting internal threats or shifting domestic dynamics

in the region. Because the EU will likely no longer need Caspian energy to bolster energy

security, Brussels has a unique opportunity to transmit its values through soft power

engagement tools instead of seeking to build ties with Caspian leaders to secure

hydrocarbon assets.

China will remain a key energy player in Eurasia. While Beijing’s natural gas

demand may deepen Chinese and Russian economic relations, natural gas exports to

China and North East Asia may not yield Moscow the political clout that it has

traditionally held in the FSU. Additionally, several factors may hamper Sino-Russian

energy relations. First, decreased EU gas imports from Gazprom may render Russia

dependent on China to buy its gas, which will give Beijing a strong negotiating position.

Moscow may limit its sales to Beijing to reduce its risk of export dependence. Second,

Russia and China may not overcome their current strained relations, especially in light of

the Kremlin’s concern over China’s growing influence in Central Asia and Russia’s Far

99

East. Third, China is poised to play a significant role in the global gas market. While

traditionally viewed as a hydrocarbon consumer, China may possess greater shale gas

resources than the United States. Moreover, Beijing has demonstrated political will to

exploit these deposits. In March 2012, China’s National Energy Agency forecasted its

shale gas sector would produce 6.5 bcm/year by 2015 and 60 -100 bcm/year of shale gas

by 2020.347 Thus, the future of Sino-Russian energy relations and its impact on Eurasian

energy networks merit further analysis.

Although it appears that unconventional gas innovations are propelling Russia

towards dependence on its customers, Moscow can play an important role in Eurasian

energy security. Russia possesses the world’s largest conventional gas reserves and will

likely remain the world’s leading natural gas exporter. Gazprom can provide significant

quantities of gas to Europe, if it is priced competitively and in compliance with EU

market rules. Therefore, EU energy security strategy should avoid alienating Russia by

employing a dual-pronged approach: integrating Russia into the European market and

diversifying sources away from Russia through Shale gas and LNG investment. Ensuring

Russian firms comply with EU regulations will likely decrease the likelihood of future

energy dependence, foster economic interdependence between the EU and Russia, and

may decrease future energy blackmail attempts as a tool of desperation to gain political

attention or market share. The terrorist attack on the natural gas facility in Amenas,

Algeria on January 16, 2013, illustrates how unforeseen shocks can disrupt global gas

supplies. Thus, Russian gas can serve as a buffer during times of energy crises in Africa,

the Middle East, or beyond. Despite the EU’s decreased vulnerability to energy

disruptions via unconventional natural gas innovations, the Eurasian energy bridge is still

necessary. The EU will likely continue to require Russian gas and Russia will likely rely

on Central Asian energy to support its domestic market. No single party is currently

situated to dominate Eurasian energy flows or achieve energy independence. Therefore,

the Kremlin’s desire to play “key center” of the gas corridors to Europe appears to be a

bridge too far in Eurasian energy relations.

347 Natali, “The U.S. Natural Gas Revolution,” 28; Stevens, “The ‘Shale Gas Revolution,’” 8; “The

Journal Report: Energy,” Wall Street Journal.

100


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